Forbes: Chile Is Heating Up

Stocks in Chile are up 75% from their low and there's good reason to expect greater gains.

I owned a "green monster" at one time. Despite my Massachusetts roots, it didn't have anything to do with Fenway Park. It was the nickname of my 1994 Mazda 626, which I sold to a neighbor about a year and a half ago. The car had served me well and still had enough life left to see his two teenagers through those dicey "new driver" years. I'm happy to report that the teens and car are all doing well.

In its place, I bought a used 2004 Honda ( HMC - news - people ) Civic from a no-frills used car wholesaler. When I walked into the office, the salesman gruffly explained, "We don't do financing here. Cash only." That suited me fine. I always pay cash for a car. In fact, I'd been slowly saving up for this car since the day I bought the Mazda ( MZDAF.PK - news - people ). And of course, I'm already saving up for the next one.

I don't just save for planned purchases. I try to save for the unforeseen. At any given time, I have between one and two years of living expenses in cash, CD's or money market accounts. Sure, that money isn't giving me a maximum return. But sometimes a good night of sleep is worth a little investment.

Going into the 2008 economic downturn, there were a number of investors, companies, and even countries having trouble getting a little shut-eye. But I'm focused on a country that was able to sleep pretty soundly.

You see, Chile was smart enough to tuck away approximately $19.5 billion from its copper revenues, fueled by abnormally high commodity prices in 2006 and 2007. That's a little more than 10% of the country's annual gross domestic product.

Most developed countries will be paying off the debt for their respective stimulus packages for years to come. Just as spending stimulates an economy, debt can dampen economic growth, but of course Chile won't have to worry about the latter. Chile basically paid cash.

There are a lot of reasons to like Chile now and not just for the country's squirrel-like fiscal conservatism. Chile's central bank estimates that inflation will be about 2.5% in 2010, comfortably below its policy target of 3%. The bank also believes that Chile's economy should grow between 4.5% and 5.5% this year. Most developed countries would give their memory foam mattresses for that kind of growth this year--or any year for that matter.

Government High, Currency Low

The U.S. stock market seems at odds with our administration's current agenda, but Chile's stock market celebrated its new administration, hitting a record high when billionaire Sebastian Pinera was elected president a few weeks ago. Pinera is the third-richest Chilean and owns a football club, a television station and an interest in LAN Airlines ( LFL - news - people ) (nyse: LFL). Rightly or wrongly, the market believes he will usher in business-friendly policies. Pinera won't be taking office until March, but he's already said he will have his cabinet announced sometime in February so he can hit the ground running.

Another reason to like Chile now is for the low valuation of the Chilean peso. The U.S. dollar has gained strength over the last couple of weeks, weighing on all world currencies. The peso's sell-off was steeper than most, however, pushed downward by an accounting rule change to the country's pension funds. The rule effected how the funds must measure their exposure to foreign exchange rates. The change resulted in a stunning sell-off of Chile's home currency as funds adjusted their currency books.

Up until this month's rule change, the peso was the third-best-performing emerging market currency, gaining 21% in the last year. There's no reason to believe Chile's currency won't continue to gain strength after this one-time adjustment. Until it does, the lower valuation makes stocks from Chile--denominated in U.S. dollars--just a little cheaper to buy.

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