Buenos Aires, Argentina May 26, 2008

Upon my arrival at home last Friday, my wife approached me with the following question: “What is the UNASUR?” Initially, I really did not know how to respond… I already have answers to some of her questions related to domestic issues such as why she cannot spend more money, why I have my clothing all messed up, who ate something, and others … but explaining the UNASUR really left me with no immediate answers at all.

To give you a little background, last Friday twelve South American countries formally ratified the Union of South American Nations Treaty (UNASUR), a regional integrative initiative going back informally to 2004. UNASUR hopes to strengthen Latin American and Caribbean unity by working together to create solutions to persistent regional problems while at the same time respecting the sovereign rights and territorial integrity of the individual member states. UNASUR hopes to achieve these goals through the development and implementation of policies addressing a diversity of issues such as those related to politics, economics, social and cultural issues, the environment, energy, infrastructure development and more. It is hoped that through addressing these concerns, solutions will also be found for the ongoing problems related to persistent poverty, social exclusion and inequality.

The members of UNASUR are Argentina, Bolivia, Brazil, Chile, Colombia, Ecuador, Guyana, Paraguay, Perú, Surinam, Uruguay and Venezuela. To give you an idea of the importance of the region constituting this union: it includes 388 million citizens with a combined GDP of $ 1.9 billion, (3.5% of the world’s GDP).

UNASUR will be headquartered in Quito, Ecuador and consist of four main bodies: the Council of Heads of State and Government, the Council of Ministers of Foreign Affairs, the Council of Delegates, and the General Secretariat. It will also create a South American Parliament, seated in the city of Cochabamba, Bolivia.

One of those most delighted by the creation of this new union was Brazilian President Lula who pointed out that: “we shall move forward with innovative projects and will fully attain the goal of financial and energetic integration, as well as that of realizing the improvement of regional infrastructure, and the creation of a social cooperation agenda.” Lula, as always, has in mind ambitious ideas where of course, Brazil takes the lead in initiatives.

In reality, the creation of UNASUR has taken many by surprise as it has happened at a moment in history when the union of so many countries seems unimaginable.

Relating to this idea, we should be mindful that this union was created at a time when many Latin American countries have reached a powerful level of macroeconomic and institutional consolidation; achieving international recognition as having gained the much desired investment grade for many of its countries.

The establishment of regional blocks is more viable now with the consolidation of the economy and institutions within these countries, coupled with a long-term vision. The regional blocks of the past have not reached significant achievements in the long run due to difficulties within their individual countries, recurrent crisis and political instability. Mercosur serves as a prime example of these kinds of problems.

In the instance of UNASUR, there is a political and ideological fragmentation among many of the signatory countries. There are countries with serious internal problems such as Bolivia. Venezuela and Argentina are plagued with internal issues as well, but to a lesser extent. There are also member state conflicts such as those between Colombia, Ecuador and Venezuela. Additionally, there are ideological divisions between several countries that make it very difficult to imagine how those countries could go forward with the successful coordination of policies.

UNASUR’s successful unification of regional forces having benefits realized by all member states will depend in part on the influential leadership of Brazil coupled with the lessening of individual differences between countries.

This brings us to the question: what benefits could UNASUR bring investors in the region? I think that there are no short-term benefits. However, if UNASUR is able to successfully establish itself, it can then contribute to the development of the regional financial market (one of its main stated goals) creating one with stronger depth and liquidity than other financial markets of the region. More importantly, UNASUR can contribute to the strengthening of the regional economies, underpinning their growth and development which will benefit the investor who will then find less risk and more profitability in their investments in the region.

The UNASUR has just been born. It will be necessary to give it time to grow and develop. We hope that the countries comprising this new group allow this to happen.

We will meet again tomorrow,

Horacio Pozzo

Editor’s Note: A new community in South America is born with a variety of diverse and complex objectives spanning cultural, social and economic realms… another aim is the social inclusion, the civic participation, the strengthening of democracy for all… Horacio’s wife is asking questions and Horacio finds he does not know how to respond. If you want to know, keep on reading… Enjoy, and send your comments to the editor here: paola@latinforme.com

Yet India remains one of the world’s great growth opportunities and investors at this level may well be getting in on the ground floor of a very major long-term profit play.

Let me explain …

India’s economy expanded at a breezy 9% clip last year. The rate of growth is expected to throttle back to about 8% this year, but that’s still excellent, justifying fairly lofty price-earnings ratios in the local stock market. Even so, market valuations there do not now appear excessive; the overall market is trading at about 18 times earnings, which is not particularly high given the economy’s growth potential.

As with China, if India can get its house in order – both politically and economically – we’re looking at the very real prospect of very rapid growth before that country’s standard of living starts to approach that of the West, causing India’s rate of growth to slow dramatically.

The bottom line: With 1.1 billion potential Indian consumers, we’re looking at a huge potential purchasing power for all kinds of consumer products.
Now, there are some potential pitfalls to be concerned about in the near term.

For instance, the current Indian government, in office since 2004, is a coalition between the Congress Party, which had ruled India for most of the period since independence, though without any great success, and the Communists (who are a pretty mild lot, but are nevertheless pro-government and fairly anti-market).

Although India Prime Minister Manmohan Singh is a moderate, the government as a whole has seen India’s economic emergence as an opportunity to fund favorite projects and social programs. For instance, this year’s budget proposes an 18% increase in public spending for the 12 months that end next March, over and above the 24% increase in public spending for the year-to-March 2008. Even after several years of rapid growth, the state budget deficit (the federal shortfall plus the local deficit) is around 7% of Gross Domestic Product (GDP). With any kind of downturn at all, that 7% could quickly swell to 10% – a point at which deficits become difficult to finance.

Now there is some hope on the horizon – an election is due in May 2009, at the latest, and the center-right opposition is currently leading in opinion polls. Even so, shrewd investing veterans know better than to rely on that alone for their investment profits.

The other current problem is inflation, right now running at 8% per annum, which means that it’s higher than the level of short-term domestic interest rates. Higher commodity and energy prices have affected India as they have other countries: India’s position is made more difficult by the poverty that afflicts much of the population. The Indian government, like the good socialists that they are, has seen fit to restrict exports of rice and to subsidize other foods and gasoline (the latter makes no sense socially, since automobiles are largely owned by the middle classes, not the poor). Needless to say, these subsidies and restrictions make the budget deficit worse; and they will pose an additional problem in the future, when they are lifted and consumer prices soar in response.

Having described some of the challenges that India faces, let’s be clear on a very key point: No market is perfect. Ironically, if it were, it would be a much less alluring investment opportunity. I mean, let’s face it: If India didn’t face the problems that we’ve detailed here, the market would be trading at a hefty 40 times earnings, well above its current multiple of 18.

The underlying truth remains that economic growth has achieved real momentum in India, that any government we can picture will do no more than slow the country’s economy incrementally, and that the economics of providing manufacturing and services from a base in India – especially in the era of the Internet – is so compelling from a cost and logistical standpoint that it must inevitably continue to produce huge profits for long-term investors for decades to come.

When it comes to India, it’s almost as if the central question no longer is “how much should I invest in India?” but rather “how can I afford not to invest in India?”

Let’s take a look at how best to invest in this fast-growing economy.

India Profit Plays

The simplest way to invest in India is via an Exchange Traded Note (ETN), in this case the Barclays IPath India Index ETN (INP), whose returns are linked to the Morgan Stanley Capital International India Index (unlike a conventional ETF, an ETN is technically a 30-year note, so it distributes assets to holders at the end of 30 years). In January, INP was trading at about a 15% premium to its net asset value (NAV). But now it’s trading very close to its NAV, having slipped backward.

As an alternative you might consider the Morgan Stanley India Investment Fund (IIF) or the India Fund (IFN), both actively managed funds investing in India, which currently trade at discounts to NAV of 2.0% and 0.3% respectively.

Individual shares to look at would include Infosys Technologies Ltd., (INFY) the India-based software giant, which following the fall in the Indian market has declined to a fairly reasonable 19 times earnings, or 16 times next year’s earnings.

Another possibility is the pharmaceutical company, Dr. Reddy’s Laboratories Ltd. (RDY), which, as a major generic drugs manufacturer, can expect to benefit from the expiration of many U.S. pharmaceutical patents in the next five years, and right now carries a P/E ratio of only 15.

Finally, you might consider an India-based automaker that’s been in the news a lot recently: Tata Motors Ltd. (TTM), which is trading at only 11 times earnings, reflecting the risk involved in a medium-sized company taking on the world automotive industry. In the luxury end of the market, Tata recently bought Jaguar and Land Rover from Ford Motor Co. (F), for $2.3 billion. At the economy end of the market, Tata has announced the Nano, a car for the Indian market that will sell for $2,500 – 40% cheaper than any other car on the world market. And that’s after Tata had a smash hit with a light truck designed for the India market, as well.

As I’ve previously articulated in several Money Morning articles, it is highly likely that – years from now – the worldwide center of auto-making will migrate from Detroit to someplace in either China or India, or both, thanks to the combined allure of low costs and potentially huge consumer markets. That means that Tata, as India’s largest manufacturer, is likely to be a key player in the global auto market of the future.

So if you know what the ultimate outcome of that global game is going to be, why not deal yourself a winning hand right now, and then sit back and wait for this scenario (and your profits) to play out?

Once again, politics are getting in the way of running the nation’s businesses. I will give you one guess which party is behind the shenanigans. Yep, it is Nancy Pelosi and her business-hating Democrats.

Apparently, their only political goal is to not allow anybody to get rich until the nation is free from poverty, a trip to the doctor is free, and every person (whether they are willing to work or not) makes the same middle-class income.

As long as Pelosi has control of the big chair in the House, you might as well hang up your goals of becoming a rich businessman. In her eyes, profits are something you can only get if you steal from your neighbor.

Colombia has poor people too

By now, you must have heard of President Bush’s goal of lowering trade barriers with Colombia. With the possibility of being a key ally in Latin America, his administration wants to ensure free trade and continued economic cooperation.

Rational thinkers see there are very few ways, if any, this deal could hurt Americans. But Pelosi and her left-leaning posse are not known for their rational thinking.

Nope, they see this as a political opportunity to stand up for the little guy. You know the guy I am talking about. He has no education, four kids, does not like the way work makes him feel, and has a killer HDTV setup. Until the American taxpayer buys him a pain-free life (and he is locked in as a Democratic voter), international policy is on hold.

Pelosi says she opposes the free-trade deal with Colombia because of the way the country treats its union leaders. They tend to get killed.

I can understand why she feels that is a bad action to support. But has anybody wondered if those labor groups would have to fight less if we let natural economic laws run their course? If free trade were allowed with Colombia, those union leaders would not have time to fight. They would be too busy working.

Vote the “right” way

Let’s face it. In November, we have a very big decision to make. To the right, we could go with a pro-business, free-market protecting leader. And to the left, we could go with a pro-citizen, big-government kind of leader.

For decades, maybe even centuries, most economists have understood that money is best (most efficiently) spent by companies. After all, they have limited funds and a bottom line to protect. Governments, on the other hand, have the ability to continuously raise their revenues and have no profit margins to worry about. So why would they care about efficiency? It isn’t their money.

That is exactly why the Government Accountability Office just announced more than 40% of all federal credit card spending during a 15-month investigation period was unauthorized of fraudulent. Your hard-earned tax dollars were spent on things like custom suits, massages (no comments Mr. Spitzer), and even lingerie.

In all, it adds up to $14 billion of our money flushed down a golden toilet.

This figure tells us that nearly 40% of our tax dollars are being wasted. How many houses would not be in foreclosure, or how many people would be able to pay their health insurance bills, or how many kids could go to college if that money stayed in the hands of the folks that earned it?

If we want the American economy to rebound and be successful, we cannot raise more trade barriers. We need to eliminate them and let natural economic laws work. Even more importantly, we need to limit the size of our government and keep the nation’s money in the hands that earned it.

So Ms. Pelosi, I hope you kept the receipts for that lingerie. We want our money back.