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Saturday, 9 January 2010
Melbourne, Australia

3 Reasons Why Latin America Could Protect Your Portfolio
By Kris Sayce

As Australian's we've been very proud about how we avoided the 'GFC'. Every media report you read has leaders patting themselves on the back for avoiding the 'the worst recession since the Great Depression'.

But while we're patting ourselves on the back, there could be an even bigger winner from the 'GFC' - Latin America.

While the rest of the world was caught up in fighting recessions, Latin America was reshaping itself. Countries like Brazil were modernizing, Colombia and Peru were reducing their crippling inflation, and Chile opened their arms to the world with Free Trade Agreements (FTA).

There's no question that like Australia, Latin America has the resources required to help fuel the world. But the question is, what has this got to do with Australia, and what could you gain from this?

But there's an even more important question. What if China stops buying our 'stuff' and buys more of Latin America's 'stuff' instead?

Maybe it's not likely, but it shouldn't be ignored, because it's a pretty big 'What if?'

You may have noticed that the recent stock market rally has been mostly driven by our mineral prices.

But if that 'What if?' happens you might be in a better position if you've already planned for it. This is where looking across the South Pacific and discovering opportunities there could provide a hedge for your resources portfolio.

First, let me explain why you would consider this.

Australia and Latin America are both major players in mining and resource industries. Despite Latin America still being viewed as a developing region, some of their infrastructure is on par with ours.

Take Brazil, it has been at the fore-front with Biofuel technology. Brazilians have been running their cars off biofuels for years.

Or take natural gas. Just like Australia, Latin America is naturally rich in natural gas. With an estimated 262 trillion cubic feet (tcf) of the stuff they'll need assistance and funding to develop liquefied natural gas (LNG) projects sooner rather than later.

Not only that, but Chile has the world's largest proven copper supply. It holds about 38% of the world's reserves of the base metal. This figure makes Australia's 4% look tiny in comparison.

But stop there. If you hold shares in BHP Billiton [ASX:BHP] and Rio Tinto [ASX:RIO] then you've already got part of your resources portfolio hedged, as they have a 57% and 30% interest in Escondida in Chile - the worlds' largest copper mine.

Back to Brazil, in addition to some of the most in-demand minerals, Brazil has about 19.7 billion tons of proven iron ore reserves. Australia has 15.5 billion tons.

Now here is something to think about, China last year imported a combined 96 million tonnes from Australia and Brazil. Simply put, just under 70% of their iron ore came from just two countries.

But if we put the similarities aside, let's look at the reasons why you may want to consider investing in Latin America.

As I mentioned earlier, you can use Latin America as a hedge. An important rule to investing is never to put all your eggs in one basket - unless you're a real punter! The fact is, Australia's resource boom can't last forever.

And you shouldn't be fooled into thinking China - or anyone else - has to come to Australia to get its raw materials.

So, what can you do? Trying to get direct exposure into overseas markets can be difficult. And not surprisingly, very few stocks with Latin American exposure are listed on the Australian Stock Exchange (ASX).

And trying to invest in international shares can be a nightmare with all of the paper work required.

But there are a couple of options. Just remember, this isn't a recommendation, but if you like the idea of getting exposure to this 'emerging market' you can look trade the Brazil, Russia, India, and China (BRIC) Index on the ASX.

It trades just like a share, and is listed with the stock code IBK. Obviously it's not a sole exposure to Latin America, but it is based on a basket of securities from all of these 'emerging markets'.

So if you want to hedge even a tiny part of your portfolio away from the Australian market this is one fairly efficient way of doing it.

It's not without risk, but it's certainly something to think about.

Regards,

Shae Smith
Assistant Editor, Money Morning