Analysis: Caveat emptor: Chile stocks look cheap, but political risk is rising
10/11/2021 07:30
By Rodrigo Campos
NEW YORK, Nov 10 (Reuters) - Chile's market darling status
is threatened by its economic and political outlook, but
investors see an opportunity as the South American country heads
into a presidential election with no clear favorite while also
rewriting its constitution.
Chile's local stocks .SPIPSA are back in the black for the
year following the rise of right-wing presidential candidate
Jose Antonio Kast ahead of first-round elections on Nov. 21. But
the index priced in dollars .MICL00000PUS is on track for a
fourth straight negative yearly return.
An index of Chilean stocks traded on U.S. exchanges .BKCL
is nearly flat for the year.
The sharp decline in the currency CLP= is partly to blame,
but the declines have come even with Chile expected to post
double-digit GDP growth this year and its central bank one of
the world's most hawkish as the economy overheats.
Economists at Barclays say no matter who wins among the top
two polling candidates, Kast or leftist Gabriel Boric, the
constitutional reform process "implies a likely deterioration of
the country's fundamentals."
JPMorgan research agrees, saying public sector debt levels
will rise beyond their current estimates in a Kast or Boric win
scenario.
"The far-left program encompasses a hefty fiscal expansion
relying on what we think are too optimistic assumptions of about
40% of the planned tax collection," Diego Pereira, chief
economist for the Southern Cone & Peru at JPMorgan, said in a
note.
"On the other side, the far-right candidate seems too
optimistic on the ability to lower expenditure and taxes and its
potential impact on economic growth, in particular given the
likely mandate for increased unfunded social entitlements
stemming from the Constitutional Convention."
Chile in May elected a constitutional convention in which
left, center-left and independent candidates won more than
two-thirds of the seats.
The re-drafting of the Augusto Pinochet dictatorship-era
constitution is expected to have an important impact on mining,
likely raising taxes in the sector.
Yet this year's rise in commodity prices, including for
copper, Chile's largest export, makes it an attractive
destination for foreign investors. Even if prices drop from
current levels, they would likely remain in an area "beneficial
to countries like Chile as far as their export orientation,"
according to Brian Jacobsen, senior investments strategist at
Allspring Global Investments.
Despite the upcoming election adding risk to the outlook,
"from our view, neither candidate really looks like a major risk
to a continued economic rebound," Jacobsen said.
"Nobody's promising people bread and circuses."
BUY ON THE CHEAP
In the local market, the leaders and outliers are shipping
company Vapores VAPORES.SN , up near 150% year-to-date,
alongside miner SQM SQMB.SN and brewer CCU CCU.SN , both up
just over 50% so far in 2021.
Foreign net flows into Chilean stocks through the third
quarter ran up to $1.67 billion according to data from the
Institute of International Finance, far outpacing 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 underperformance of the index makes Chilean
stocks a rebound candidate as well, with EM specialist Tellimer
adding them to their top picks for this month as they are
considered "cheap" and a play on copper demand.
On the policy side, they say "Chile retains legal safeguards
for orthodox economic policy."
But the uncertainty brought by the constitutional changes is
a step too far as it implies a will to drift away from Chile's
economic model, according to Daniel Grana, manager of EM equity
portfolios at Janus Henderson.
"We don't know the end result of it, but it would seem
probable that it involves a lot more social spending at the
expense of a much higher tax rate on the mining sector," he
said.
In that scenario, Grana added, "political governance will
dilute the benefit to minority shareholders of what we expect to
be a very strong copper outlook."
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Chilean peso performance versus select peers https://tmsnrt.rs/3qiQonZ
Chile stocks price to earnings ratio https://tmsnrt.rs/3mVWVTx
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(Reporting by Rodrigo Campos; Editing by Dan Grebler)
((rodrigo.campos@reuters.com; @RodrigoCampos;))