(FORTUNE Magazine) – We're going to have to switch to my office," says Andy Skov apologetically, ushering me out of the conference room. "I want to be near my phone and computers." Skov, 32, is Morgan Stanley's point man for Latin American investments, and on this late March afternoon Brazil's stock market is being wracked by rumors that Sergio Motta, the man in charge of the country's telecommunications policy, died while secretly being flown to the U.S. for surgery. "This is the kind of stuff that characterizes this market," he says.

No one ever said emerging markets were easy. But Latin America remains one of the few places on earth where you can buy fast-growing companies at a discount to their growth rates, and Skov has made a ton of money investing there. He runs seven portfolios specializing in the region; the best known is $58 million Morgan Stanley Latin America A. Over the past three years, according to Morningstar, the fund's annual return of 37.5% has made it the top performer in its region.

Back at his office, Skov quickly checks activity in the Brazilian market, and scans the headlines for word about Motta. (The rumor proves false; Motta is ailing but alive.) Then, turning from his screens, he makes his case for investing to the south.

Last fall scared a lot of emerging-markets investors. Why return to Latin America now?

Latin America represents the closest thing to the U.S. economic model outside the U.S. It's further along in embracing free-market reforms than Europe, but it trades at a huge discount to Europe, Asia, and the U.S. Latin economies are slowing at the moment, but our basic target is 15% earnings growth or greater. The weighted P/E of our portfolio now is about 13 times this year's earnings.

And the risks?

I'm not going to say it's all upside from here. Latin America needs foreign capital to grow, and so for the foreseeable future it will be vulnerable to the whims of overseas investors. Also, its economic base is natural resources, so its stock markets are exposed to commodity price fluctuations.

Right now the region's most pressing issue is Brazil's currency, the real, which is 15% to 20% overvalued. Brazil is a semi-fixed exchange-rate regime, which means that its currency devalues relative to the dollar at a managed rate, roughly 7% per year. For the past three years, and especially since the Asian crisis, currency traders have been attacking fixed-rate regimes, including the real. It's not clear whether they will allow Brazil to bring its currency down in an orderly way or instead force a devaluation sooner.

How has Brazil handled the pressure?

Admirably. The central bank jacked up interest rates to as high as 43% in November to show the currency markets they meant business. The progress they've made on economic reforms and this year's emergency fiscal cuts gives us further confidence that they have not only the resources but the will to maintain price stability. One of the key measures of this strategy's success is the amount of cash coming into the country. And year to date, Brazil's government debt offerings have attracted between $10 billion and $15 billion in fresh money--a real vote of confidence.

Won't 43% interest rates strangle the economy and the market?

Rates have come down to 28%, which is a good sign. And Brazilian stocks are up 6.3% this year, compared with a 0.5% loss in the MSCI Latin America index.

What stocks look good to you in Brazil?

Our No. 1 stock, at 15% of the portfolio, is Telecomunicac?es Brasileiras, or Telebras, the monopoly telecommunications provider for all of Brazil. The stock is like AT&T in 1980, when it had long distance and local. Plus, Telebras has cellular, which makes up about 20% of its revenues. There is huge pent-up demand for phone service in Brazil, where there are now just ten telephone lines per 100 inhabitants, compared with 60 in the U.S. Earnings are expected to grow 18% a year, while the stock still trades at 11 times earnings. Within a year, Telebras will be broken up into 13 pieces and sold to multinational companies. AT&T, MCI, WorldCom, Telefonica de Espana--all of them will be bidding.

How about other Latin American markets?

We're in seven countries there, but the ones that really matter are Brazil and Mexico, which together make up 80% of the index. I'm very concerned about Mexico now. The economy is sucking in too many imports at the same time that oil prices have fallen [10% of Mexico's exports are oil], and the relatively strong peso has made Mexican goods less competitive with Asian goods. That has given the country a very high trade deficit, which the currency markets will not tolerate. As a result, interest rates must remain high, which is never good for equities.

Among the smaller Latin markets, we think one of the best macroeconomic stories is Argentina. Political risk there is minimal; they have a currency board, which eliminates currency risks. They've got the lowest interest rates on the continent, and economic activity has been breakneck for two years now. On the other hand, like Mexico, Argentina suffers from a widening trade deficit, and we've been somewhat defensive on that market as a whole, though we like individual stocks.

Like what?

Our favorite is Telefonica de Argentina. Last year their cellular business adopted "Calling Party Pays," which has enormous implications for cellular growth. Simply put, if you get a call, you don't have to pay for the air time. So penetration and usage of cellular phones goes way up. That has helped the company's operating earnings grow 25% a year, and the stock trades at about 15 times earnings.

What's your favorite pick in Mexico?

It's a cement company called Cemento Mexicanos, or Cemex, a play on Mexico's heavy investment in infrastructure and construction. It's a world-class company that has actually been buying outfits in other emerging markets and developed markets as well. I'm convinced that within ten years there will be a lot of other Latin American companies doing the same.