Feliz Año Nuevo To The Latin American Banks

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Parts of this post have been redacted due to the author’s wish to remain anonymous.While investors should think strongly of steering clear of financial institutions in the United States and Europe, now may be the time to get into some of the Latin American banks before the recovery takes hold and boosts valuations. 

Feliz Año Nuevo, América Latina! 

Argentina has come very far over the last few years.  Unemployment has dropped from 20.8% to 7.5% since 2002.[1] The currency has stabilised, growth in exports has driven the trade surplus, and President Cristina Fernandez de Kirchner’s controversial use of reserves to retire high yield debt seems to be turning out better than anticipated. 

The strengthening ties between Argentina and China now extend beyond exports of grain and soy.   China is pumping billions of dinero into Argentine infrastructure upgrades. [2]

Argentina is one of the few countries nowdays that has the problem of growing too fast.  The country had to sell its central bank notes, known as Lebac bills, to soak up excess liquidity.  This is a measure necessary to keep its 11% inflation in check, as the Lebac base has increased threefold from last year’s levels. [3]  With loan to GDP ratio at 14%, there is plenty of room for credit to grow.[4]  The improved financial climate has been made evident in shares of several Argentine banks.

Argentina appears to be  on its way, but there are risks.  The Presidential Election in October could throw a curve ball to the positive momentum.  The movement to privatize public utilities will not be a simple one.  And let’s not forget the remaining debt defaults that need to be resolved. 

The growth trend is reflected in several other countries in LatAm.  Chile has done well with attracting foreign capital, exports a large portion of the world’s copper, and with tame inflation and 4.3% growth rate, the economy appears well run.[5]  It’s not just the mining industry that seems to be on a tear in Peru.  A similar story applies here as in Chile: burgeoning credit demand, developing infrastructure, and a commodity bull run.  2010 was the year for coffee, and Colombia was the beneficiary.  Several large money centre banks have entered the Colombian market and may possibly start executing a rollup strategy.[6]  

For country specific plays, investors may consider the iShares MSCI Chile Index Fund (NYSE: ECH), Global X/InterBolsa FTSE Colombia 20 ETF (NYSE: GXG), or the iShares MSCI Peru (NYSE: EPU).  There is presently no way to invest in Argentina through a single country ETF. 

Vehicles providing exposure to general region include the SPDR S&P Emerging Latin America ETF (NYSE: GML) or the iShares S&P Latin America 40 Index Fund (NYSE: ILF), which tracks the performance of the S&P Latin America 40 Index, consisting mainly of Brazil, Mexico, and Chile, with a minor weighting to Peru.

The information contained in this presentation contains confidential information regarding Diamond Oak Capital Advisors, LLC (“Diamond Oak”) and may contain information regarding hedge funds and other investments recommended or otherwise analysed by Diamond Oak.  This document is not an offer to sell, nor the solicitation of an offer to purchase, any interest in Diamond Oak or any hedge funds or other investments discussed herein.  An investment in any hedge fund or other investment discussed herein may be undertaken only through such fund or investment, may be speculative, and may involve a high degree of risk.  An investor in hedge funds could lose all or a substantial amount of his or her investment.

Certain information contained in this presentation has been obtained from sources outside of Diamond Oak and its affiliates. While such information is believed to be reliable for purposes used herein, no representations are made as to the accuracy or completeness thereof and neither Diamond Oak nor its affiliates takes responsibility for such information.  Past, pro forma, hypothetical, projected, or suggested performance of any investment or portfolio of investments is not necessarily indicative of future performance.

This document is neither advice nor a recommendation to enter into any transaction with Diamond Oak or any hedge fund or other investment.  This presentation and its contents are proprietary information of Diamond Oak and may not be reproduced or otherwise disseminated in whole or in part without Diamond Oak’s consent.

[1] Trading Economics, January 2, 2011.  www.tradingeconomics.com/Economics/Unemployment-Rate.aspx?Symbol=ARS 

[2] Delfeld, Carl.  “Investing in Argentina: Why You Should Look for “Trouble” If You Want Bigger Returns,” Investment U, September 2, 2010. 

[3] Inflation rate from Trading Economics  January 2, 2011.   http://www.tradingeconomics.com/Economics/Inflation-CPI.aspx?Symbol=ARS, Lebac statistic from Reuters: http://www.reuters.com/article/idUSN2317286620100923 

[4] Reuters, September 23, 2010.  www.reuters.com/article/idUSN2317286620100923?pageNumber=2 

[5] Trading Economics, January 6, 2011.  http://www.tradingeconomics.com/chile/indicators/ 

[6] Colombia Reports, “Colombia’s bank sector opening to investment.” Friday, August 27th, 2010.

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