Latin America: One of the Most Compelling Growth Stories on the Planet

      If you're ignoring Latin America's investment potential, then you're missing out on one of the most compelling economic growth stories on the planet. Many regions throughout Latin America are enjoying a large-scale economic renaissance, falling inflation and increasing political stability. And going forward, all of this should power tremendous returns for the well-placed investor.

      Unfortunately, many American investors still seem to regard Latin American economies as volatile, racked by intermittent periods of rampant inflation and currency collapses. But for the most part, that era is over -- and has been for most of this decade. In fact, some Latin American economies now are as admirable as any in the world. The metamorphosis has been stunning. Just consider the case of Brazil . . .

      Brazil's Transformation
      Brazil has become the model of economic success for Latin America. However, when looking at the country's stellar growth and stability today, it's hard to imagine that as recently as 1994, Brazil was an economic disaster.

      As you can see from the chart below, the nation's monthly inflation averaged more than 38% in June of 1994, and the annual rate approached a staggering 5,000%. The country was also haunted by a bloated government sector given to profligate spending and an economy dominated by a host of inefficient, state-owned businesses.

      But Brazil began to take steps to improve the situation that year, enacting a series of economic reforms and stabilization measures called the Plano Real (Real Plan). The country introduced a new currency, the real, which was pegged to the U.S. dollar. That peg was partially lifted a few years later, although Brazil has continued to fight inflation and manipulate interest rates to maintain the currency's value.

      Just one year after inflation peaked, the annualized rate had dropped to around 33%. And three years later, inflation had plummeted to around 7%.

      In addition, under the government of Fernando Herique Cardoso, Brazil embarked on a privatization campaign. The government sold off airplane and defense company Embraer and iron ore giant Companhia Vale do Rio Doce, among a host of other former state-owned enterprises.

      Back in 2003, many worried that the country's new president, the left-leaning Luiz Inacio Lula da Silva, would reverse the reforms of his more right-wing predecessors in the late 1990s. After all, Lula was a prominent union activist and social agitator in his early career, and his Worker's Party wasn't known for being investor-friendly.

      But that didn't happen. The Lula government has continued to pursue a policy of economic reform and fiscal discipline -- inflation has since fallen steadily under his watch. In fact, the nation's Central Bank has targeted (and so far maintained) an inflation rate of around 4.5% over the period from 2007 to 2009.

      The Brazilian Growth Curve
      Meanwhile, Brazil even paid off a series of IMF loans, which were taken on during its period of economic instability, two years ahead of schedule. And under Lula, Brazil has remained largely in favor of free trade, both with other Latin American nations and with the developed world; relations with the U.S. remain solid.

      But economic reforms are more than just squeezing excessive inflation out of the system. True reform also leads to stronger economic growth, lower unemployment and a burgeoning consumer sector.

      Brazil has certainly seen all of that come to pass over the past decade. The country will likely see overall real Gross Domestic Product (GDP) growth of +4.0% in 2008, and most analysts are looking for growth rates to remain above this level on average through the end of the decade. This is just a continuation of a strong growth curve that's been ongoing for years.

      And the Brazilian government has undertaken steps to help re-accelerate growth. The country has implemented the Programa de Aceleracao (PAC), designed to boost investment in basic infrastructure such as roads, rail networks and ports, via a series of tax breaks and direct spending. Although poor infrastructure has hampered Brazil's growth and its ability to export goods in recent years, the country's renewed investment in infrastructure should help resolve that issue.

As the economy has gained ground, unemployment has also improved markedly -- dropping from the mid-teens just five years ago to about 9% today. And a healthier employment market has powered meaningful wage growth and ignited the Brazilian consumer. As my chart illustrates, retail sales have trended steadily higher since 2001.

      This increase in domestic demand will help reduce Brazil's dependence on export-led growth. But that's not to say the export situation is poor.

      Brazil is rich in natural resources and basic commodities. The list includes crude oil and gas -- Brazil's oil production currently stands at 1.8 million barrels per day, up close to half a million barrels per day since 2001. That's one of the fastest rates of production growth in the world outside OPEC. With global oil demand in a long-term uptrend, and new supplies ever-harder to find, Brazil's oil trove is a major boon.

Meanwhile, Brazil is also one of the world's leading exporters of soybeans, a crop that's used both directly as a food source and as food for livestock. And Brazil also grows copious quantities of sugarcane, much of which it converts to ethanol. Finally, on the metals front, the nation's Companhia Vale do Rio Doce has quickly become one of the world's largest producers of industrial

      Follow the Leader
      Of course, Brazil is just one of many countries in Latin America that show signs of promise. While others may not be quite as far along the path to reform, there are encouraging signs.

      For example, Colombian President Alvaro Uribe has made significant strides in reducing that country's inflation rate and improving its financial standing. The government has cut spending and hiked interest rates to reign in inflation. It is also gradually privatizing its remaining stakes in many Colombian businesses. Colombia's economy is projected to grow at a rapid clip of around +5% in 2008, and that rate is forecast to moderate only slightly over the next several years.

      Elsewhere, the Chilean economy has been booming in recent years thanks to strong exports of raw materials, most notably copper. Chile has also benefited from a strong central bank policy of inflation containment and is home to one of the most open, trade-friendly economies in all of Latin America. The economy is set to expand +5.0% in 2008 and is projected to show similar growth through the rest of the decade.

      Searching for High Yields in Latin America
      While the Latin American growth story is impressive, the region is even more compelling when looked at from an income investing perspective. In fact, Latin American companies now offer some of the largest dividend yields on the planet.

With this in mind, I recently put the finishing touches on an in-depth research report entitled: "Heading South for Higher Yields."        In it, I profile several high-yielding foreign stocks, including a Brazilian telecom that not only offers an enticing 8% dividend, but has also delivered total returns of +338% over the last five years! How many telecoms in the U.S. can claim this sort of return?       As you can see, expanding your investment horizon beyond U.S. securities can certainly pay off. That's why serious income investors need to be looking

      To learn more about my premium investing service, and to reserve your copy of my newest research report -- "Heading South for Higher Yields" -- please visit this link.

-- Nick Lanyi
Editor, High-Yield International