MEGAX U.S. Global Investors Funds, Holmes Macro Trends Fund (MM)

By Carla Mozee

A clause in the $900 billion U.S. economic stimulus package, which could be voted on by the Senate Friday afternoon, might mean trouble for some Latin American stocks.

The so-called "Buy American" clause, already in the stimulus package passed by the House of Representatives last week, says the government's big infrastructure projects should rely on U.S. steel and iron, and use U.S.-made equipment. It also calls for government employees uniforms to be made of U.S.-made textiles.

The Senate's version also seeks to favor a broader range of manufactured goods made in the U.S. over those that are made overseas.

Should the clause go through as it stands, one can at least expect "a temporary" pullback in shares of Latin American exporters, according to Robb Lutts, chief investment officer at Cabot Money Management.

Equity plays

The U.S. is key for Latin American countries, such as Mexico which sells 84% of its goods to the U.S.

In 2007, the U.S. imported more than $8.6 billion worth of copper, iron and steel from Latin America and the Caribbean, according to U.S. Census Bureau data. Iron and steel imports have more than doubled to $3.92 billion between 2002 and 2007, while imports of copper and related products have more than tripled to $4.68 billion.

Latin American stocks surged back on Dec. 8, when details started to emerge about the incoming Obama administration's plans to launch the biggest infrastructure program in the U.S. since the national highway system was created in the 1950s.

That day, Mexico's benchmark closed up more than 5%, and Brazil's index shot up more than 8%. An exchange-traded fund representing the Mexican market (EWW) also jumped by 7.8% as investors poured money into shares of companies poised to earn a cut from the potential bonanza of federal dollars.

Among those leading the gains that day, Brazilian integrated steel producer Gerdau SA (GGB) surged 14%, and Vale (RIO), the world's largest supplier of steel component iron ore, climbed 10% on their home markets.

Mexico's Cemex SAB (CX) soared 27%. Cemex is the largest supplier of cement and ready-mix concrete to the U.S.

Many of these stocks have held onto their December gains so far. It remains unclear whether those companies would be hit by the "Buy American" restrictions, as they have production plants within the U.S. The restrictions as they stand now don't invoke goods made in the U.S. by foreign companies.

Cemex, Gerdau, Argentine steel tube producer Tenaris SA (TS), and Mexican steel-maker Grupo Simec (SIM), are among those with extensive production bases in the U.S.

But Brazilian steel makers Companhia Siderurgica Nacional (SID) and Usiminas would be hurt because of U.S. export restrictions, according to Raphael Biderman, an analyst who covers the steel, mining, pulp and paper industries at Bradesco Corretora in Sao Paulo,

And the "Buy American" provisions for textiles could weigh on home-listed shares of Colombian companies that export such materials, such as Coltejer SA and Fabricato-Tejicondor SA, said Jairo Agudelo, a textile, commerce and food-sector analyst at Medellin-based InterBolsa.

Trade war?

But much more could be at stake should the restrictions lead to a broader conflict on international trade.

A chorus of criticism from U.S. trading partners including Canada, Brazil and the European Union, was sparked late last month when the House of Representatives first included the rule.

"The U.S. must be fully aware that whatever it does in policy initiatives, and trade policies in particular, they are likely to be emulated [on] the world stage," said Guillermo Mondino, head of Latin America Research at Barclays Capital in emailed comments.

President Barack Obama earlier this week said that he didn't want to start a U.S. trade war against its partners. The Senate then included a clause stipulating that purchasing provisions will be "applied in a manner consistent with U.S. obligations under international agreements."

The "Buy American" rules wouldn't be good policy for the U.S. as it would bog down trade activity "if you have all these protection measures," said John Derrick, director of research at mutual-fund company U.S. Global Investors.

The firm's U.S. Global MegaTrends fund (MEGAX), which focuses on constructing, engineering and other infrastructure companies, climbed nearly 3% as part of that December rally.