Betting on the “Bad Boy of Latin America”

Nicholas Vardy

Nicholas Vardy has a unique background that has proven his knack for making money in different markets around the world.

Nevertheless, our strategy is to re-enter the relatively strongest-performing stock markets gradually as opportunities emerge. And in the spirit of our slogan “there’s always a bull market somewhere,” this week’s Global Bull Market Alert pick, the Global X/InterBolsa FTSE Colombia 20 ETF (GXG), is a bet on the “bad boy” of Latin America: Colombia.

For most investors, it’s hard to imagine Colombia as anything but a "Scarface"- style “narco” state. Yet, this popular image of Colombia does not do the country justice for the progress that it’s seen since the ascension of Alvaro Uribe, the country’s tough and popular president, in 2002. After battling double-digit inflation and 20% unemployment in the early part of the last decade, Colombia introduced economic reforms that have turned around its economy — shrinking its national debt and kick-starting its economic growth.

It’s a tribute to the success of Colombia’s economic policymakers, that while many Western economies danced on the precipice of economic collapse, Colombia only suffered a mild recession. The country’s industrial production fell 5.9% in 2009 — barely a blip when compared with countries like Spain, Germany and Japan, where production plummeted more than 20% in 2009.

The government did prime the pump through a "stimulus package," which included a 14% year-over-year increase in construction spending and public works projects in 2009. Yet thanks to prudent fiscal finances, by the end of this year, Colombia’s net debt still will equal only about 38% of GDP. That’s less than half the level it was only four years ago, and where the United States and the United Kingdom will stand by the end of 2010. With the economy expected to expand 2.5% this year, the governor of Colombia’s central bank is lobbying for an investment-grade rating for Colombia — something Brazil achieved only in 2008.

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With a population of 44 million, and an economy the size of Indiana, Colombia never will have the economic heft of its larger BRIC rivals. But Colombia is now a place where you can make money as a stock market investor. Not only is Colombia one of the top-performing markets in the world in 2010, it also is one of the very few that has broken out to new highs in 2010.

So buy the Global X/InterBolsa FTSE Colombia 20 ETF (GXG) at market today, and place your stop at $31.75. There are no options on this one. A word of warning: this is a relatively illiquid exchange-traded fund (ETF), so you may want to limit the size of your investment accordingly.

Portfolio Update

iShares MSCI Chile Investable Mkt Idx (ECH) rose 5.88% this past week, as Chile cements its position as one of the top performers of an otherwise weak 2010. Chile remains a BUY. Tighten your stop to $54.50.

iShares FTSE/Xinhua China 25 Index (FXI) traded back up this week, as China’s export growth dominated the headlines. I am convinced the Chinese bubble will burst. It is not a question of “if" but "when.” But for now, this bet against China is a HOLD

CurrencyShares Japanese Yen Trust (FXY) dropped back 1% this week, as Japan was gripped by political deadlock over the weekend. With the recent bout of yen-buying — driven by strong risk aversion — running out of steam, I am recommending that you SELL the yen at current levels to lock in your gains.

SPDR Gold Shares (GLD) was flat, trading off its lows of last week. With the recent pullback just a blip in an otherwise long-term upward trend, GLD remains a BUY.

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PowerShares DB US Dollar Index Bullish ETF (UUP) dropped slightly this week. With risk aversion on the wane, let’s keep UUP at a HOLD but watch your stop of $24.00.

P.S. If you want to keep up with my latest insights on developments in fast-paced global markets, you can now follow me on Twitter on @NickVardy or on my new blog, NickVardy.com.

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