by Carla Pasternak
As the Director of Income Research behind High-Yield International, it's my duty to find the best income investments all over the world. And what I'm finding is that few places can compare to the yields and growth we're seeing in South America right now.
One country I've been tracking has the fastest-growing economy in the region. Experts peg its GDP growth this year at more than +8%. JPMorgan just upped its growth estimate to nearly +10% -- that's twice the rate of better-known spots like Chile and Brazil.
This "miracle" country is growing faster than its neighbors because it doesn't rely on the United States for growth. The economy is more reliant on exports of mainly food and fuel to Latin American neighbors.
And while fast-growing economies often attract hordes of investors, that's not the case here. In fact, the benchmark stock index has returned +31% so far this year. Compare that to Chile, where the economy grew half as fast, but stocks have returned +37%. So while the economy is booming in this country, there are still reasonable valuations.
The booming country I'm talking about is Argentina.
The rare combination of yields and growth
Not only is the nation growing at a tremendous clip, but I've found yields approaching 9% as well.
So why aren't more investors flocking to Argentina? One reason is its troubled history. At one time, it was one of the wealthier countries in the world. But that all changed in the 1990s, when Argentina's economy faltered. In 2001, the country even defaulted on $95 billion of debt. Unemployment soared to 25% and the Argentine peso collapsed against the dollar.
The good news is all that is in the past. Argentina is in the midst of an economic revival. The nation produced five straight years of +9% GDP growth through 2007, and even managed to eke out gains during the global recession.
I am keeping an eye on Argentina's inflation; it's a natural byproduct of such rapid growth. Inflation rose to an annual pace of +11.2% in July -- the highest level in four years. This was the official rate the government published, but some estimate the actual rate was closer to +25%.
Argentina tolerates some inflation as a trade-off for higher growth, so I'll keep watching it. But when you consider the risk of just investing in the United States alone, that inflation looks less scary.
Consider that Argentina enjoyed a budget surplus of 0.5% of GDP late last year, while debt to GDP was only 49%. By comparison, the U.S. has a deficit of 9% of GDP and a debt to GDP of 83% in 2009. Argentina's unemployment of 7.9% in June is also considerably less than our 9.6%. When put in those terms, the real risk seems to be not expanding your horizons outside the United States.
It has taken a decade, but Argentina is finally regaining credibility with investors. This June, the government repaid nearly all of Argentina's outstanding debt that defaulted in 2001, including interest. Credit agency Fitch recently upgraded the rating on Argentina's government bonds from "B-" to "B." That's still speculative, but on the right track.
But we care about yields, so where do you find income plays in developing countries like Argentina?
I usually start my search with the telecoms. Just like at home, these can be dividend stalwarts in foreign countries. And with economic development, many foreign telecoms are seeing rising earnings, thanks to broadband services.
I also like to study the banks. Banks are on the front line of growing economies. Thriving businesses need loans to expand their operations and more consumers begin borrowing to purchase homes, cars and other big ticket items. In other words, the banks can make money hand over fist -- and they're typically generous in paying their earnings to investors as dividends. For example, Argentine bank BBVA Banco Frances (NYSE: BFR) trades in the U.S. and is paying close to 6% to stateside investors.
One more thing... By my count, you can buy 18 Argentine stocks as American Depository Receipts (known as ADRs) on the New York Stock Exchange, including the aforementioned BBVA Banco Frances. With that sort of convenience, it's a no-brainer to put more of your portfolio in high-yielding foreign stocks.
Disclosure: Neither Carla Pasternak nor StreetAuthority, LLC hold positions in any securities mentioned in this article.