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The myth about Latin America being a region always on the brink of a financial crisis is still on the minds of many investors across the world.

The reality, however, is very different. The region has been on a sustainable path of long-term growth for quite a while and the investment opportunities across different countries and sectors are here to stay.

Indeed, over the last decade the region's economy has reached a significant degree of stability, breaking what appeared to be a perpetual cycle of strong growth followed by severe economic downturn.

Looking back a few decades, the 1950s and 60s saw strong growth across some of the major economies but the 1970s, 80s and 90s were marked by recurrent crises as the region struggled with high inflation and high levels of external debt. Mexico was forced to devalue its currency in 1976, 1982, 1988 and 1994 while Brazil suffered years of hyperinflation, which was finally tamed by a fixed currency regime that itself collapsed in a forced devaluation and a US$30bn IMF bailout in 1999. In 1982 most of Latin America, with the exception of Colombia, defaulted on its debt.

Over the last few years, the government of countries such as Brazil and Mexico, whose stock markets account for more than 85 per cent of the MSCI Latin America index, have moved away from focusing on short-term growth measures and taken full advantage of the strong global economy to pay off foreign debt and achieve low single digit inflation, laying the foundations of long-term growth. Both Mexico and Chile have been rated investment grade for several years, while Peru and Brazil have just received investment grade ratings from Fitch and S&P respectively.

Recent economic indicators across the region are generally very good and do not show the kind of imbalances that led to previous crises. In particular there has been a dramatic improvement in Latin America's current account as a proportion of GDP, which was in deficit from 1980 to 2005 and entered into surplus last year. This surplus has shrunk over the last few months but still it is a cushion that was not there before.

Graph 1: Economic indicators for 2007

Source: F&C, Santander

Even more dramatic has been the growth in foreign reserves experienced over the last few years rising from around $20bn in 2006 to nearly $120bn in 2007. In the past, the region did not have enough foreign reserves to get through a crisis, but this has now changed. As a result, Latin American economies are now much more in control of their own destiny.

In addition to this boom and bust reputation, another myth about Latin American is that investments in the region are a pure commodity play, but this is far from being the case.

Commodities are undoubtedly a very important part of the market but they represent less than half of the index. At the end of March the MSCI Latin America index had a 46 per cent exposure to commodity stocks and 54 per cent to non-commodities.

It is also important to highlight that these figures overstate the true importance of commodities in the economy since commodity companies tend to be very large cap companies. If we look at commodity exports as a proportion of GDP in 2005, for instance, these only represented between 5 per cent to 6 per cent in Mexico and Brazil, which shows that the index is much more overweight in commodities than the economies themselves.

Moreover, economic growth through the region is mainly being driven by the domestic sector and not exports.

Graph 2: Growth across the region was mostly driven by the domestic sector in 2007

Source: Morgan Stanley, F&C

Domestic demand remains a main driver for growth and the consumer side of the economy is still very well positioned as buying power continues to be boosted by significant job creation and better access to credit. As a whole Latin American corporates and consumers are still very underleveraged and in some economies the proportion of bank lending relative to GDP is less than 10 per cent, compared with over 200 per cent in the US.

Infrastructure spending across the region is another important growth driver. The government of the two largest economies, Brazil and Mexico, are planning to spend billions in infrastructure over the next few years.

Brazil, Mexico and Colombia are the three economies currently offering the most attractive investment opportunities in the continent.

In Brazil, the growth acceleration programme announced by the government last year includes $280bn of public and private sector infrastructure investment between 2007 and 2010. Job creation in the country hit a record 1.9m last year, with bank lending growing 25 per cent year on year. The Brazilian economy is indeed showing very strong momentum, offering attractive valuations and a wide range of stocks to choose from.

Moreover, Brazilian investors have been moving money away from fixed income and into equities, boosting the local stock market. An important medium term driver of the Brazilian market are inflows from domestic pensions and mutual funds that have historically invested over 80 per cent of their portfolios in bonds.

The Brazilian stock market is roughly 60 per cent commodity stocks and 40 per cent non-commodities. While the commodities side of the market has enjoyed strong growth over the last few years as a result of the global environment, the domestic side is also benefiting from the strong economic momentum. Interestingly, Brazil is now a net external creditor, meaning the sum of Brazilian private and public sector external debt is less than the country's internal reserves.

In Mexico, the government is also planning to spend a vast amount of money, some $230bn, on motorways, railways, airports, electricity, oil refineries and oil production between now and 2010, with $50bn being invested this year alone.

Despite the high exposure to the US economy, Mexico's resilience has surprised analysts that were expecting a significant slowdown. During the last US recession of 2000, Mexico was badly hit because its economy lacked drivers other than exports to the US.

Today, the Mexican economy is much more balanced, banks have started to lend and solid finances are allowing the government to have counter-cyclical fiscal in place, using the windfall from oil revenues for social spending and infrastructure investing. At present we are finding compelling investment opportunities on the Mexican wireless, infrastructure and housing sectors.

Colombia is also becoming the focus of attention as major improvements to security have led to a boom in investment and consumer spending. As security improves, companies are now able to invest in parts of the country that in the past were not accessible. For example, very small towns in Colombia are starting to get their first supermarkets and the first bank branches opening up. The economy is growing very rapidly – 7.5 per cent growth last year – and the market is still very underowned, making it a very interesting investment story.

Opportunities also exist in some of the other economies in the region. One of our biggest concerns at present is Argentina where we find the economic policy to be incoherent and unsustainable. Luckily, Argentina is a very small market, only representing 2.3 per cent of the index.

The slowdown in global markets has driven many investors towards emerging markets' growth story. As a region Latin America offers investors attractive opportunities to generate investment returns and it is better placed to withstand global volatility than in the past.

Recent economic data shows Latin American economies are much more diversified than they are often believed to be and domestic growth will continue driving the region for years to come.

Urban Larson is manager of the F&C Latin American Equity fund