Saturday, December 4

Chilean stocks look cheap, but political risk increases

The market favorite status of Chile It is threatened by its economic and political outlook, but investors see an opportunity as the South American country heads to a presidential election without a clear front-runner, as it rewrites its constitution.

Chile’s shares are back in black numbers in the year after the rise of the right-wing presidential candidate Jose Antonio Kast before the first round elections on November 21. But the dollar-priced index is on track for a fourth consecutive negative annual return.

An index of Chilean stocks traded on US exchanges is almost flat for the year.

Sharp fall in the currency

The currency’s sharp fall is partly to blame, but the declines have come even as Chile is expected to post double-digit GDP growth this year and its central bank is one of the most aggressive in the world as the economy overheats.

Barclays economists say that regardless of who wins between the two top-voted candidates, Kast or the leftist Gabriel Boric, the constitutional reform process “implies a probable deterioration of the fundamentals of the country.”

The JPMorgan report agrees, saying that public sector debt levels will rise beyond their current estimates in a Kast or Boric win scenario.

“The far-left program encompasses a strong fiscal expansion that is based on what we believe are overly optimistic assumptions of around 40 percent of projected tax revenue,” he said Diego Pereira, chief economist for the Southern Cone and Peru at JPMorgan, in a note.

Too optimistic

“On the other hand, the far-right candidate seems overly optimistic about the ability to lower spending and taxes and its potential impact on economic growth, particularly given the likely mandate for increased unfunded social rights stemming from the Constitutional Convention.

Chile elected a constitutional convention in May in which candidates from the left, center-left and independents won more than two-thirds of the seats.

The reworking of the constitution from the time of the Augusto Pinochet dictatorship is expected to have a major impact on mining, likely by increasing taxes in the sector.

However, rising commodity prices this year, including copper, Chile’s largest export product, make it an attractive destination for foreign investors.

Even if prices fall from current levels, they are likely to remain in an area “beneficial for countries like Chile in terms of their export orientation,” according to Brian Jacobsen, Senior Investment Strategist at Allspring Global Investments.

Although the upcoming elections add risk to the outlook, “from our point of view, neither candidate really looks like a significant risk to the continuation of the economic rebound,” Jacobsen said.

“No one is promising people bread and circuses.”

Buy at a low price

In the local market, the leaders and outliers are the shipping company Vapores, which is up about 150 percent so far this year, along with the mining company SQM and the brewery CCU, both up slightly more than 50 percent so far in 2021.

Net foreign flows to Chilean stocks up to the third quarter amounted to $ 1.67 billion, according to data from the Institute of International Finance, far exceeding the net $ 204 million for all of last year and more than the $ 1.27 billion seen in the first nine months of 2019.

But the overall poor performance of the index makes Chilean stocks a rebound candidate as well, and emerging markets specialist Tellimer has added them to his top picks for this month as “cheap.”

Regarding politics, they affirm that “Chile preserves the legal safeguards for an orthodox economic policy.”

Uncertainty with changes

However, the uncertainty that the constitutional changes have brought is too big a step, since it implies a willingness to move away from Chile’s economic model, according to Daniel Grana, Equity Portfolio Manager for Emerging Countries at Janus Henderson.

“We do not know its final result, but it seems likely that it will involve much more social spending at the cost of a much higher tax rate for the mining sector,” he said.

In that scenario, Grana added, “political governance will dilute the benefit to minority shareholders from what we expect to be a very strong copper outlook.”

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