Latin American stocks and mutual funds focused on that region have had a resurgence over the last two years. That’s largely because of China’s strong demand for raw materials and the U.S. economic rebound, both of which have helped fuel the market for commodities and other exports from countries south of the border.

The average Latin American fund (there are only five) returned 39.7% for the 12-month period through November, while the S&P/IFCI Latin America index gained 43.2%. By comparison, the S&P 500 index of exclusively U.S. stocks was up 12.7% during that span.

Brazil and Mexico have the region’s largest economies. Growth in Latin America last year was primarily spurred by growth in Brazil, notes William Landers, who manages the Merrill Lynch Latin America Fund (MALTX).

Brazil’s economy got a boost in 2003, Landers recalls, when foreign investors realized that the country would pay off its debts under newly elected President Luiz Inacio Lula da Silva. This year, Brazil, a major exporter of iron ore, wood pulp, and agricultural products, has benefited from China’s thirst for commodities, he says. Landers argues, too, that Brazilian stocks also are the cheapest among emerging-markets equities.

Mexico’s economy tends to track that of the U.S., where the bulk of Mexican exports go, observers say. “As things improve in the U.S., things will improve in Mexico,” notes Mark Jason, an AIM Funds analyst who follows Latin American stocks. Mexico, an oil exporter, has also gotten a lift from recently high oil prices, says Paul Rogers, who runs the Scudder Latin America Fund (SLALX).

Portfolio managers and other observers agree that investors should keep no more than 5% of their assets in Latin America funds, however, because of their narrow focus and the political and economic risks inherent in investing in any emerging market.– Richard Diennor