Agustino Fontevecchia, 12.28.10, 12:00 PM ET

Emerging markets are leading the global economic recovery, and that story is unlikely to change in 2011. But while China draws the most attention, tame inflation and growing domestic demand in Latin America makes investments in Brazil, Chile and elsewhere just as likely to deliver strong returns as their Asian counterparts.

“In terms of outright secular trends, Latin America seems to be making strong progress,” says Nick Chamie, chief emerging markets strategist at Royal Bank of Canada. The story in Asia is well understood but inflation threats, which led China to hike benchmark interest rates for the second time in three months on Christmas Day, could tap the brakes on the region’s blockbuster growth.

A research report from Bank of America-Merrill Lynch suggests that accelerating capital inflows, stronger domestic demand and minor risk of inflation mean Latin America could move to the fore in 2011. “Contrary to 2010 when the key focus was on external demand as a source of growth…domestic demand [will] drive growth in 2011,” BofA-Merrill says, considering the tepid growth projected for developed markets that have traditionally been the end consumers for the raw materials produced by the region.

In Pictures: 10 LatAm Leaders For 2011

Analysts expect Latin America’s historical flaw, inflation, to remain subdued. “Latin America’s overall imported inflation is expected to remain low into 2011,” reads BofA-Merrill’s report. This will lower pressure on central banks to tamper with interest rates, especially given currency appreciation and low growth in developed economies, which will likely limit the appetite for tighter monetary policy.

BofA-Merrill expects Latin American equities are to return 27% in local currency in 2011, thanks in large part to expectations that earnings will grow considerably (26% in U.S. dollar terms), anchored by “domestic growth engines positioned to benefit from higher commodity prices, and low perceived macro risk given that countries, companies and households are underleveraged.”

Latin American equities are not particularly cheap, trading at a discount of 1% to global equities, as measured by BoA-Merrill’s 12-month forward P/E ratios. On a country basis, Chile looks expensive at a 37% premium to global equities and Mexico is priced at a 25% premium, while Brazil trades at an 11% discount to the rest of the world.

Paying up for a better growth story is probably worth the risk. Global economic growth has embarked on a two-tier path; BofA-Merrill expects the G5 countries to show GDP growth of 2% in 2011, compared with 4% for Latin America. Meanwhile, loose monetary policy and low yields on domestic assets will send capital from developed nations beyond borders in search of returns. Much of that will ultimately land in emerging markets like those of Latin America, rendering slightly elevated valuations less of a concern.

Brazil is likely to lead the way. “Dilma Rousseff’s election [as president] is likely to maintain continuity of [predecessor] Lula’s policy direction – a pro-growth, state interventionist model,” says RBC.

Commodity companies that play on a global scale like miner Vale and oil giant Petrobras find demand worldwide, but as Brazil’s household wealth increases, domestic consumer companies are also poised to prosper. AmBev, Latin America’s largest brewer, and Cosan, a sugar and ethanol producer, are tied into the food, drink and fuel needed for a growing consumer base.

Mexico, home to the world’s richest man, Carlos Slim Helu, has the tailwind of short-term interest rates near zero to help propel GDP growth, which BofA-Merrill expects to hit 3.2% in 2011. Corporate profits should grow even faster, 32% in U.S. dollar terms.

In Pictures: 10 LatAm Leaders For 2011

Both Televisa and America Movil, controlled by Slim, are keyed to the Latin American market but are also increasing their international presence. Televisa is expanding into the U.S. Latino market through a partnership with Univision, while America Movil, the mobile arm of Telmex, is the fourth-largest mobile network provider worldwide. As it competes with Spain’s Telefonica in the mobile market, America Movil is also expanding into TV content production in Colombia.


Elsewhere in Latin America, Argentina has lagged behind its larger neighbor Brazil in both influence and economic growth. Inflation is a concern, but the instability cause by the death of former president Nestor Kirchner may open the door for more pro-business policies. Cresud, an agricultural company that is involved in crop production including wheat and soybeans, cattle raising, and real estate investment, both rural and urban, is a direct bet on growing food needs in a part of the world where populations are rapidly expanding. MercadoLibre, Latin play that centers on rising household wealth.

Chile and its billionaire president Sebastian Pinera will try to grow from the strength of its mining sector in a bid to establish itself as a financial and business hub. The OECD expects GDP to grow 6.2% in 2011.

Peru, on the other hand, was unscathed by the global financial crisis and has reaped the benefit of a commodity boom, with prices for its main exports — copper, silver, and gold — surging in reaction to a weak dollar and loose monetary policy in the U.S. and elsewhere.


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