(MONEY Magazine) – I've got a timely question for you: What are the odds that higher taxes will help stocks? Based on history, we'd say 9 to 2 against. Over the past 80 years, the federal government has raised the top income tax rate 11 times. And in all but two of those cases, stocks have fallen 15% or so within the following two years, according to David B. Bostian, chief economist at Herzog Heine Geduld in New York City. If those don't sound like great odds, you're probably looking for alternatives to U.S. stocks. Here's a great one you may not have thought of: Latin America. That idea may sound crazier than eating a jalapeno pepper sandwich. But the fact is, it isn't outlandish at all. ''Countries such as Mexico, Chile and Argentina are cutting taxes, lowering tariffs and deregulating many industries,'' says analyst Thom Albrecht at A.G. Edwards in St. Louis. ''Eventually that will show up in higher equity prices.'' Moreover, stocks are cheap there, trading at an average of 10 to 14 times earnings, compared with 16 to 22 for U.S. stocks. But there's a short-term risk: uncertainty about whether Congress will approve the North American Free Trade Agreement (NAFTA). The agreement ''would be extremely positive for the whole region -- Central and South America as well as Mexico,'' says Richard C. Young, president of Young Research & Publishing in Newport, R.I. If the agreement is delayed, Mexican stocks, in particular, could suffer. But they'd bounce back. ''Ultimately,'' says Michael T. Porter, closed-end country fund analyst at Smith Barney Shearson in New York City, ''there's going to be one hemispheric trade zone.'' Investors who want to cash in on the trend should start by looking at Telefonos de Mexico, the $8 billion Mexican telephone company (ticker symbol: tmx ; recently traded as an American Depositary Receipt on the New York Stock Exchange at $51.25). Analyst Juan Carlos Garcia at Salomon Bros. in New York City expects the company's profits to grow 12% a year as TelMex upgrades Mexico's inadequate phone system. Garcia thinks the stock could rise at least 17% to $60 within 18 months. Young sees TelMex reaching $100 a share in three years or so.

For those who want to diversify into South America as well, closed-end funds are a convenient choice. Analyst John Hock at Merrill Lynch in New York City suggests Latin American Equity Fund (laq; NYSE, $15.75), which has assets of $100 million and trades at a 2% discount. The fund has 46% of its portfolio in Mexico, 17% in Chile, 15% in Brazil and 10% in Argentina. Aggressive investors also may want to look at Brazil Fund (bzf; NYSE, $16.50), with $200 million in assets. It's selling at a 12% discount, compared with an average 2% discount for the past year. ''Brazil presents the greatest risk but has the greatest upside,'' says Porter at Smith Barney. Over the next three years, he thinks Brazil Fund could samba to a 100% profit. And that's dancing music.

BOX:

-- THE ECONOMY After expanding at an anemic 1.6% annual rate in the second quarter, the economy probably won't grow more than 2.5% over the next 12 months. -- STOCKS Stocks are clearly overpriced, with the Dow near 3600. If the market reaches 3800, we would recommend selling all but the shares you intend to hold long term. -- BONDS We expect the annual rate of inflation to top 3.5% by year-end. In addition, long-term bond yields could rise to 7.25%. And that, in turn, would cause prices of 30-year issues to decline as much as 6%.

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