As the crow flies, it's 4,400 miles from Punta Arenas, Chile, to Barranquilla, Colombia.
Make no mistake, a rising tide has lifted many boats in South America.
Brazil has witnessed a remarkable economic renaissance, and is now the world's seventh-largest economy. To the south, Argentina remains blessed with an impressive set of natural resources, and a well-educated middle class. But these countries are also beset by deep-rooted structural challenges, and are increasingly being run with a dubious government hand. Investors need to brace for inflation scares, GDP slumps, social unrest and currency swings, and the higher risk doesn't necessarily yield greater returns.
Yet if you pivot west, you'll find a completely different economic environment.
Chile, Peru and Colombia, which are often referred to as the Andean nations, possess all the key virtues that emerging-market investors seek: a stable and growing middle class, abundant natural resources, and most importantly, sound government policies. It's that second factor -- stable and growing middle classes -- that really explains the deep appeal of these countries.
They are all charting a path laid out by Japan in the 1960s and '70s and South Korea in the '80s and '90s: Build a strong base of industry and banking, and develop a set of policies that supports domestic economic consumption, thereby setting the stage for a surge in residential construction, leisure spending, and auto and home appliance ownership. That creates a virtuous cycle -- such developed economies need more lawyers, professors, retailers, and other professionals, who in turn help create further waves of consumer spending and economic development.
To be sure, with per-capita GDP of around $19,000, Chile is well down this path. Yet there is still a long runway of growth ahead. Japan and South Korea, for example, have GDP per capita of $37,000 and $33,000, respectively, according to the International Monetary Fund (IMF).
To close that gap, Chile is doing what those Asian powerhouses did in the past: boost infrastructure. While Brazil is beset by clogged ports, pockmarked roads and a generally stressed infrastructure, the Chilean government has adeptly used private capital in tandem with government funds to rapidly improve its infrastructure, according to the Inter-American Development Bank.
Brazil's inflation rate hovers above 6%, thanks to infrastructure bottlenecks, while Chile's central bank expects inflation rates to cool from a current 4% to 3% by year's end. For investors, those comparative inflation rates have a direct impact on real returns.
Meanwhile, global investors have a chance to invest in Chile while the chips are down. A slump in copper prices has pushed the iShares MSCI Chile ETF (NYSE: ECH) 38% lower since the start of 2011, compared witha 51% gain for the S&P 500. Notably, the Chilean economy is less dependent on resource exports in the past, and this exchange-traded fund (ETF) reflects the steady expansion in domestic consumption. Consumer and financial stocks represent roughly 45% of the portfolio, while utilities account for another 25%.
To Chile's north sits Peru, which is arguably poised for the region's strongest growth thanks to savvy government policies that have helped the economy double in size over the past decade, while pushing inflation below 3%. Peru's population of 30 million is twice as large as Chile's, though the middle class is only just starting to expand at a faster pace. Per-capita GDP stands at $11,000 but is rising quickly.
The iShares MSCI All Peru Capped ETF (NYSE: EPU), like its counterpart in Chile, has slumped badly since the start of 2011, though it's worth noting that this ETF does have greater exposure to mining and industrial stocks. Still, it's hard to ignore the fact the Peruvian economy is expected to grow in the 5% to 6% range in 2014 and 2015, according to the IMF.
Heading toward the top of the continent, you'll find Colombia, which may be the most dynamic economy in the whole region. My colleague Joseph Hogue, like many other North Americans, has settled into that country, no doubt lured by a fast-growing economy that was in deep distress just a decade ago. I share his view: I've visited Colombia on several occasions over the past five years, and I'm amazed at the rapid pace of economic development.
That said, the Global X FTSE Colombia 20 ETF (NYSE: GXG) hasn't endured the sharp pullback seen by the Chilean and Peruvian funds, and its portfolio isn't quite as inexpensive based on traditional valuation metrics. Still, Colombia appears set to greatly benefit from a "peace dividend," as that country's long-running civil war winds down, and its middle class gets ready to spend.
Risks to Consider: The caveat for any emerging markets applies here: These markets are volatile, can rise or fall at a fast pace and should never be bought with a short-term time horizon.
Action to Take --> These three countries are set to feed off each other as rising middle classes represent a growing target for the biggest regional companies. As an example, the Falabella retail chain, which is the second-largest holding in the Chilean ETF, is rapidly expanding its footprint into Peru and Colombia as well. These are truly buy-and-hold ETFs. How the underlying economies perform in 2014 or 2015 is not relevant. Instead, it's the fact that these countries are on the same wealth-inducing path trod by Japan and South Korea, which should lead you to expect robust gains over the course of the next decade.