Why Latin American Stocks Could Get Hot

Domestic demand looks promising, unless the developed world pulls emerging markets under.

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President Dilma Rousseff has repeatedly called for Brazilian borrowing costs more in line with those of global peers such as fellow emerging powerhouse China.

[See What Growing Enthusiasm for the Yuan Signals for the U.S. Economy.]

What's more, in a favorable move for equity investment, Brazilian Finance Minister Guido Mantega scrapped the tax on foreigners' equity purchases two years after he implemented the levy to curb investment in the country's financial markets and stem a currency rally that cut into exports. Concerns about the Brazilian real's strength eased after the currency plunged some 13 percent in the past four months as Europe's debt crisis eroded demand for emerging-market assets. Brazil is keeping the 6 percent tax on foreigners' fixed-income investments. Domestically, Brazil cut taxes on home appliances and staple foods, factors that are supportive to consumer stocks.

"I see significant opportunities in emerging markets consumer companies in markets such as Brazil, China, and Russia," says John Carlson, manager of the Fidelity Total Emerging Markets Fund (FTEMX). "After the recent sell-off, consumer discretionary companies are trading at valuations similar to consumer staples companies despite having more rapid earnings growth prospects."

And that familiar commodities profile doesn't hurt either. "Since Latin America is commodity-rich (given its large endowment of natural resources), it experiences a significant positive 'wealth shock' when commodity prices rise," says Goldman's Ramos. "The macro resilience accumulated in recent years has better prepared the region to withstand negative price shocks, and so a downward correction of commodity prices should not in itself trigger disruptive macroeconomic dynamics."

Here's a list of the top-ranked Latin America-focused stock mutual funds tracked by U.S. News:

Fidelity Latin America Fund (FLATX): down 7.9 percent over one year; up 15 percent in the past month; 1.03 percent expense ratio; $3.1 billion in assets.

BlackRock Latin America Fund (MDLTX): down 15.5 percent over one year; up 16.9 percent in past month; 1.53 percent expense ratio; $754 million in assets.

JPMorgan Latin America Fund (JLTAX): down 11.9 percent over one year; up 15.9 percent in past month; 1.91 percent expense ratio; $74.2 million in assets.

T. Rowe Price Latin America Fund (PRLAX): down 14.9 percent over one year; up 16.6 percent in past month; 1.24 percent expense ratio; $1.9 billion in assets.

DWS Latin America Equity Fund (SLANX): down 14.4 percent over one year; up 15.9 percent in past month; 1.76 percent expense ratio; $610.9 million in assets.