Latin American sizzle is far from over

Investors in Latin America's markets have good reason to feel pleased with themselves: the MSCI Latin American Index has risen 86% since 2003 and is up 38% so far in 2005.

So what next? Might it be time to take some profits off the table? Taking profits is never a bad idea, says Christopher Williams, writing in Barron's, but those with an appetite for risk will want to stay in, or even, in the wake of a "sharp sell off" in October, add to their holdings. The fact is that the "sizzle south of the border" is far from finished.

Resource-rich Latin America is a prime beneficiary of the "through-the-roof-prices for coffee, copper and other commodities" and the IMF is forecasting region wide GDP growth of 4.2% next year, roughly the same as that expected this year.

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That may not put the likes of Brazil and Argentina in the same growth league as China, but it certainly makes them look a lot better than much of the developed world, where growth next year looks like it is going to be a measly 2.7%.

Better still, Latin America is cheap. Economies and company fundamentals may have improved (Forbes magazine points to better current-account positions, lower budget deficits and rising corporate profits), but valuations are still knocking around their 2003 levels (an average p/e of nine times). In Brazil in particular there are several "compelling stock bargains" with quality firms trading on only eight times their 2006 earnings.

There is risk on the horizon, in that Brazil, Mexico, Ecuador and Colombia are all scheduled to hold elections in 2006, but few managers expect any of them to result in a reversal of the market-friendly policies the current incumbents have instigated. Damian Fraser, Latin equity strategist for UBS, sees at least 27% upside for Brazil over the next 12 months, and most analysts are looking for low double-digits returns from the region as a whole next year. One good way to get exposure to the region is through the Invesco Perpetual Latin American fund, which has gained an impressive 64% so far this year.