Skipping the obvious when investing in Chile

By Peter Kohli

While many don’t think about it, in South America, Chile, Colombia and Peru offer excellent alternatives to Brazil, which, in my opinion, will likely face significant social upheaval over the next three to five years, no matter what the outcome of the World Cup or its October elections (something I touched on in a previous article). In this column, I’m going to focus on Chile and the opportunities it presents.

But before going any further, I want to explain why I'm not suggesting perhaps the most obvious alternative to Brazil, the Andean Exchange. Seemingly anyone bullish on Chile, Colombia and Peru would consider investing in the stock exchange formed in 2011 by these three countries.

There are three simple reasons why I'm not now focusing on the Mercado Integrado Latinoamericano (MILA), as it's also known. First, it was designed to promote intra-regional trade, and, second, this was done to help diversify the constituent economies away from their historic commodity bases. Third, none of the three ETFs based on the exchange have done particularly well.

I prefer to make picks based in specific sectors at this time. I think investors looking for an alternative to Brazil will be better served by country-specific opportunities driven by what I think is a key economic growth factor: a growing middle class; namely consumer goods, finance and infrastructure.

In the past decade, the middle class in Latin America grew 50%, according to the World Bank. As millions work their way up the social and income ladder, they spend more on personal goods, require more access to credit and finance, and start to demand better and more reliable infrastructure from their governments.

Of course, international companies like Unilever and Procter and Gamble /zigman2/quotes/202894679/composite PG -0.09% are well positioned in Chile to take advantage of the growing demand for consumer goods, but there are some home-grown companies to consider also.

Available to United States citizens through ADRs, there is the beverage company Compania Cervecerias Unidas /zigman2/quotes/204562529/composite CCU -2.56% . In financial services, there is Banco Santander Chile /zigman2/quotes/201782644/composite BSAC -0.16% .

To tap into the demand for infrastructure, there is electricity company and Enersis .

There is no denying that Chile is mainly a commodity-based economy. The government gets 12% of its revenue from gold and it is the largest exporter of copper in the world.

For those bullish on this sector, note that in 1971 Chile nationalized the copper mines. There is little access to Codelco, the company controlling about 20% of the world's reserves of copper and also the world's largest copper producer. One way of getting commodity access would be through one of Codelco's major partners, such as London-based Anglo American /zigman2/quotes/201381512/delayed UK:AAL -1.16% . Meanwhile, Toronto-based Barrick Gold controls or is a partner in most of the major gold-mining projects in Chile.

However, at this point I'm looking at these countries through the prism of a growing middle class and making suggestions from that point of view. The health of most commodity sectors, not just Chile's, depends upon global development and specifically the growth of the major consumer, China. So a bet on commodities would have less correlation to the growth of the country's middle class.

For a fund that has significant weighting to both middle class-oriented companies as well as some mining exposure, consider iShares MSCI Capped ETF /zigman2/quotes/205935893/composite ECH -0.60% . Among its top holdings tied to the health of the middle class are consumer discretionary, Chilean department store Falabella (11.16%) and supermarket chain Cencosud (5.00%). On the commodity side, it holds energy firm Copec (7.89%) and materials firms SQMB (4.30%) and CMPC (3.77%).