Your clients are probably feeling gun-shy about investing in equities these days, but well-chosen stocks may be more attractive than fixed-income — and there are some interesting possibilities in South America.

With relatively low government debt, Chile, Colombia and Peru got through the global financial crisis and ensuing recession relatively lightly; furthermore, their central banks are proactive and have been successful in keeping inflation under control.

Chile is the most mature economy, with per capita income of around US$12,000 — a little higher than Brazil’s US$10,800 and Mexico’s US$9,600 and way above Colombia’s US$6,200 and Peru’s US$5,200. Chile, a major copper producer, has a long track record as a well-managed economy with a transparent corporate governance. And its privatized pension system is the envy of the world.

Colombia is a mining and oil producer that has made huge strides, both fiscally — its debt was raised to investment-grade by the major U.S. credit-rating agencies earlier this year — and in its battles against both guerrillas and illegal drugs, for which operations have been substantially reduced.

Peru, with copper, zinc, gold and natural gas, is the most risky market because of the unexpected win by leftist Ollanta Humala in the June federal election. There was an initial sell-off of stocks, then a rally after Humala chose his cabinet and stated that “economic progress and social development must be jointly pursued.”

But money managers remain cautious. “We are waiting to see how these words translate into practice when the new government debates policy issues, including taxes on mining companies, expanding pensions and increases in minimum wages,” says Matthew Strauss, portfolio manager, emerging markets and foreign exchange strategy, with CI Investments Inc. ’s Signature Global Advisors division in Toronto.

Another concern is that some of Colombia’s drug production has moved to Peru.

Many publicly traded companies in these countries are resources producers. But growth in consumer spending as incomes rise is also a major investment theme in these countries — one that many stock analysts prefer to pursue indirectly through financial services stocks that benefit from increasing consumer credit as well as growth in the economy.

There are 26 Chile-based companies that have American depositary receipt versions of their shares, but only nine each for Colombia and Peru. Liquidity is an issue with Colombian and Peruvian stocks because pension funds own a significant portion of the outstanding shares.@page_break@Here’s a look, by country:

> Chile. Southern Copper Corp. and Angofasta PLC are sound copper companies, but many analysts feel their current valuations reflect their earnings prospects. New York-based J.P. Morgan Securities LLC rates both stocks as “neutral.” (Note that Angofasta is a Britain-based firm that trades on the London Stock Exchange.)

Sociedad Quimica y Minera de Chile SA is a fertilizer company that Al-Wadhah Al-Adawi, an emerging markets equities specialist with New York-based GLG Partners Inc. — a subsidiary of Britain-based Man Group PLC, which manages Scotia Latin American Fund — finds attractive. Although Quimica is much smaller than PotashCorp., Al-Adawi says, it is a global leader in fertilizers, selling in more than 100 countries. He also considers Quimica’s valuation the more reasonable of the two firms’.

Banco Santander Chile is another option. Al-Adawi expects 17%-20% loan growth in Chile in the next couple of years. Santander is more expensive than its Brazil-based peers, but Al-Adawi feels this is warranted because it is the leading bank in Chile and also one of the most efficient of the emerging-market banks, with an efficiency ratio (non-interest expenses as a percentage of total revenue) of around 37%.

However, J.P. Morgan analysts prefer Brazil’s banks and have an “underweight” rating on Santander.

> Colombia. Bancolombia SA is this country’s leading bank, with about a 20% market share. With loans to gross domestic product at around 30% in Colombia, there’s huge growth potential for mortgage and personal loans as well as corporate lending, says Al-Adawi, who expects loan growth of about 45% for the next few years as the loan/GDP ratio rises to more normal levels of 55%-70%. He thinks Bancolombia can sustain its return on equity at 20%-22%.

J.P. Morgan’s analysts are less enthusiastic, rating the stock “neutral.” Although they see positive credit trends benefiting this bank, they feel its stock is fairly valued, given their estimate of only high single-digit revenue growth this year.

Al-Adawi also favours Pacific Rubiales Energy Corp., an energy exploration and development company that trades in Canada. The company is quite confident about its potential in Colombia and Peru.

J.P. Morgan analysts have a “buy” rating on this stock.

> Peru. As in Colombia, there is huge loan growth potential in Peru, making Creditcorp, one of the country’s largest financial services firms, a “fantastic way to participate in the country’s growth,” says Al-Adawi. He thinks the stock’s valuation is at “very interesting levels,” so big gains are likely for investors who get in early.

Strauss says Creditcorp is a good example of a firm providing direct exposure to the local economy, but he does not hold the stock.

Compania de Minas Buen-aventura SA is a gold and silver producer — and mining is vulnerable to tax increases with the new government. Still, Al-Adawi says, gold is an interesting place to be in the current global environment.

J.P. Morgan analysts, who rate Buen-aventura’s stock “neutral,” like the firm’s more than 50-year record of reserve replacement and its ongoing commitment to organic growth in its reserve base — a combination that, they say, is a rarity these days. IE