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By Elliot Turner

Chilean wines are the "in" thing these days at the local wine stores, yet when it comes to developing world investments, Asia is popular and Brazil (NYSEARCA:EWZ) is sexy, but for the most part, Chile is an afterthought.

This is despite the fact that Chile has the largest GDP out of any South American economy (including Brazil) and despite the fact that its equities have strongly outperformed its more hyped regional peer year-to-date (Chile is up 16% YTD, while Brazil is down 7%). Next time you pick up a Chilean wine at your local liquor store, think about ECH, the Chilean ETF.

In 2007, the word “decoupling” was in vogue. Analysts loved the growth in the BRIC countries and pushed forward the notion that regardless of which way the United States economy were to go, these developing countries reached a sustainable level of organic growth in order to withstand a global economic slowdown. Well as it turned out, that wasn’t quite the case. When the subprime crisis led to a large-scale financial crisis in the US, the rest of the world also shared in the pain.

Many companies in their recent earnings reports are touting strong international demand, particularly from Asia, as catalysts for the strong earnings reports we are seeing. This occurred despite the pains and chaos experienced in the US during the past quarter, in which the S&P dropped nearly 15%. During the same quarter, Chile (as represented by ECH), tacked on a modest, albeit relatively strong 3%. If the chart is any indication, Chile is a prime location for investors to turn in the quest for a developing nation decoupling from the US.

Why Chile?

Chile is a relatively developed country for Latin America, with a long history of a civic society. The 17 year reign of its military dictatorship, while harsh, was relatively brief and tame compared to most its regional peers. Chile is the first South American country and only “developing nation” to gain admission to the Organisation for Economic Co-operation and Development (OECD), an international organization committed to democracy and free markets. Even during its dictatorship, the country enjoyed relatively free markets, and liberalization has only increased as political freedoms increased.

The state owns and operates its own copper mines through CODELCO, the largest copper miner in the world. As its owner, the Chile ensures that much of its mineral wealth remains within the country’s borders and is managed correctly. Chile operates one of the most successful and balanced sovereign wealth funds in the world, which enabled the country to undertake an aggressive stimulus plan in the face of a troubled global economy in 2008. In Boom, Bust and Better Policy, both Joseph Stiglitz, a Nobel prize economist, and Chris Canavan, the Chief Risk Officer at Goldman Sachs (NYSE:GS), highlighted Chile as one of the ultimate success stories in its ability to manage economic and resource volatility with a sovereign wealth fund.

Moreover, state ownership of the copper mines ensures that the government need not rely on debt financing for its domestic budget. The government is fiscally conservative and is mandated to run a surplus of 1% of the GDP. As such, Chile enjoys a stable A+ credit rating with S&P.

Although the state owns and operates CODELCO, the country by and large is fully committed to free markets and free trade. Chile enjoys free trade agreements with the US, the European Union, Canada, China, Mexico and Japan, among others. Its pursuit of global free trade agreements was certainly a factor in Chile’s invitation and admission into the OECD, as is the nation’s history of a developed civic society and a demonstrated commitment to democracy.

Recent Developments:

In 2008-09, Chile went through a recession that lasted for three quarters. Chile undertook a $4 billion economic stimulus in order to help ease the burden of declining international trade. Even a devastating earthquake in February of 2010 could not derail Chile’s robust recovery from the global recession.

In June 2010, the Chilean Central Bank raised interest rates to 1% in order to slow down the inflation which has come with a strong economic recovery and rallying copper prices. The central bank has a respected long-term track record of maintaining relatively mild and tame inflation. In its recent outlook, the Central Bank issued expected GDP guidance of between 4 and 5% annually, and an inflation estimate of 3.8%. This GDP forecast was slightly lower than earlier in the year due to damage from the earthquake; however, long-term growth remains on track. Moreover, the Central Bank raised its estimate for domestic demand from 12.4% growth to 14.5% in 2010.

in june 2010, the central bank raised interest rates to 1% as it aims to keep inflation in check. central bank has a respected track record of maintaining inflation. expect GDP growth of between 4 and 5 percent, and an inflation estimate of 3.8%. the country was devastated by an earthquake not too long ago, but since then they have come roaring back. earthquake contributed to lower GDP forecast. bank predicts domestic demand will grow 14.5% in 2010, up from its prior outlook.

The Chart Breakout:

As copper prices have broken out recently, so too has Chile’s equity market (as represented by ECH).

Chile looks to continue its breakout to 52-week highs.

(Click to enlarge)

Disclosure: Author is long ECH

Source: This Chile Is a Hot Investment