Latin American economies have matured by leaps and bounds the past 20 years, but this fast-growing region remains tricky terrain for most investors. For on-the-ground insight, we turned to Heiner Skaliks, manager of Strategic Latin America (SLATX,888-716-7116), rated by Morningstar as one of the top Latin American funds since its May 2010 launch. Based in La Paz, Bolivia, Heiner and his team are locals with readyaccess to companies and government officials. And having grown up in the region, he has an edge in identifying shifting political winds and consumer tastes. It also helps that Heiner spent three years working for the World Bank overseeing financial-sector projects in Latin America.

What do you see as the key themes at play in Latin America today?

Latin America has shown quite a bit of resiliency during the past year, despite the global economic downturn. Three factors are at play—governments and companies have been getting credit upgrades; more responsive central banks; and an environment that is friendlier to direct foreign investment, such as less onerous capital requirements and lower taxes.

A key ongoing trend is the rise in consumerism. We’re seeing higher levels of consumption and an increase in per capita income for the middle class, so middleclass families are buying their first cars, motorcycles, houses and televisions. Population-wise, Latin America is about twice the size of the US, with 600 million people, so it’s a huge potential market.

Another trend is regionalization: Companies are expanding outside their home countries and growing smartly because of this. This is especially true of firms that provide consumer staples and financial services. Financial services have a low degree of market penetration throughout the region, so there’s still lots of room for expansion and cross-selling.

How have you been allocating your assets recently?

That depends on the country. In Brazil, we favor bonds because of relatively high interest rates, and creditworthy companies. The Brazilian economy is being hurt by China’s economic slowdown, since Brazil is one of China’s key trading partners. So we expect Brazil’s stock market to be flat to slightly down over the next year or so.

To stimulate growth, Brazil’s central bank has cut the key interest by 5 percentage points in the past year, to 7.5 percent. Given local inflation of 4 percent to 5 percent, the real return is attractive.

In Mexico, we favor both stocks and bonds: stocks, because any better-than-expected growth in the US will have a spillover effect on the Mexican markets; bonds, because we think the Mexican peso is slightly undervalued, so there is potential for some foreign-exchange gains.

Mexico’s ruling party, Partido Revolucionario Institucional (PRI), is private sector-oriented and will also work to grow the country’s housing stock and develop infrastructure. That’s one of the reasons we like Homex Development Corp (NYSE: HMX), one of Mexico’s largest homebuilders, and Cemex (NYSE: CX), since cement is a key building component. Homex is at a very attractive price right now, and Cemex is very underpriced despite a recent rebound. The cement maker has sold some assets to strengthen its balance sheet and improve cash flow, and the shares were recently around $8.

Along the same lines, we favor the equity markets in Colombia and Peru because we see the potential for growth and attractive valuations.

What do you like in Colombia and Peru?

Colombia is one of the fastest growing economies in Latin America and home to several significant manufacturing conglomerates, which in previous years were not that active because the government was still dealing with the FARC guerillas. But now that the government’s relationship with the guerillas has improved, Colombian companies are starting to capitalize on their demographics and geographic position within the region.

For example, Bancolombia (NYSE: CIB), the largest bank in Colombia, is developing a greater presence in Central America, so growth is no longer solely dependent on gains in local market share. In Peru, we favor consumer staples companies, such as Alicorp (Peru: ALICORC1), which is the Kraft (NSDQ: KFT) of Peru, making everything from soap and dog food to cookies and pasta. It’s pursuing a three-year expansion strategy that will push it into other Latin American countries.

We also like Compania de Minas Buenaventura (NYSE: BVN), which is one of the largest gold companies in the world. The Peruvian government has adopted new regulatory and tax measures favorable for the company, and we think its current price is well below fair value.

What countries are you avoiding?

We’re not bullish on Argentina. There’s too much risk posed by the rules of the game being changed mid-investment.

We used to trade energy company YPF (NYSE: YPF), but no longer. In the beginning of 2012, our sources in Argentina indicated President Cristina Kirchner was going to do something drastic in the oil and gas industry. We strongly suspected some level of nationalization was possible. There was also talk about limiting the amount of dividends that the banking industry could distribute in order to force the local banks to strengthen their balance sheets and increase domestic lending. So we decided to avoid YPF, and now its ADRs are trading in the mid-teens, and Argentina is even more in the spotlight because it’s not being particularly kind to foreign investors.

Argentina was one of those countries that seemed to be moving in the right direction just a few years ago. What prevents other countries in the region from making a similar about-face?

I think it has to do with the degree of political maturity, democracy and institutionalization in a country. It also depends on whether the financial sector and local capital markets have developed an understanding of how easy it is to damage foreign investor confidence and how long it takes to regain it.

Countries such as Chile have been rated as investment grade for years, and the desire to maintain that rating has become ingrained in its culture and politics. Peru is another example where there was concern about how radical President Ollanta Humala was going to be when he was sworn in last year. But Humala turned out to be quite moderate, despite his leftist ideology, because he realized he needs to maintain a smoothly functioning private sector for his country to develop. These are the types of countries where we see less political risk.

Venezuela and Ecuador are countries where we see considerably more political risk, and we’re largely neutral on Paraguay because of the ousting of that country’s president not long ago. We’re also neutral on Guatemala and Honduras. We think all the other countries in the region will largely respect international norms.

I see that MetLife (NYSE: MET) figures prominently in your portfolio. What’s the connection to Latin America?

MetLife has significant operations in Latin America, so while everyone associates it with Snoopy and Park Avenue, last quarter most of its revenue was generated by its Latin American operations. It’s not only a global company with a strong emphasis on Latin America, we also see it as a good gauge of the US equity market.

Should any sectors be avoided?

There’s been a lot of movement in the energy sector, and we foresee a lot of continued volatility there. We’re also looking for a bit of a downturn in steel and copper plays, as well as weakness in energy-generation and distribution companies. Many of these large groups in Latin America are owned by Spanish companies, such as Endesa. If the economic troubles continue in Spain, they’ll probably extract from their Latin American assets to strengthen their balance sheets.