Chilean stocks seem cheap, but political risk increases in the country

The favoritism of the Chilean market is threatened by its political and economic landscape, but investors see an opportunity as the country heads to a presidential election without a clear favorite, while drafting a new constitution.

Chilean stocks are back in the black in the year after the rise of right-wing candidate José Antonio Kast before the first round on November 21.

The index of Chilean stocks traded in the United States remains almost flat for the year.

The sharp fall in the currency is partly to blame, but the declines have occurred even as the Gross Domestic Product (GDP) is expected to grow by double digits this year and its central bank is one of the most aggressive in the world in raising interest rates. interest as the economy overheats.

Barclays economists say that regardless of who wins the favorites, closet or the leftist Gabriel Boric, the constitutional reform process “implies a probable deterioration of the country’s fundamentals”.

JP Morgan 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% of projected tax revenue,” said Diego Pereira, JP Chief Economist for the Southern Cone and Peru. Morgan.

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

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

The replacement of the Constitution from the time of the Augusto Pinochet dictatorship is expected to have a significant impact on mining, probably 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 drop from current levels, they are likely to remain in a zone “beneficial for countries like Chile in terms of its 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, none of the candidates really seems a significant risk to the continuation of the economic rebound. No one is promising people bread and circuses”He added.

Buy at a low price

At the local level, the leaders are the shipping company Vapores, which has risen nearly 150% so far this year, along with the mining company SQM and the brewery CCU, both with a rise of just over 50%.

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

However, the overall poor performance of the index makes local stocks a rebound candidate as well, and emerging markets specialist Tellimer added them to his selection for this month as he considered them “cheap”.

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

However, the uncertainty that the constitutional changes have brought is great, since it implies a willingness to move away from Chile’s economic model, according to Daniel Grana, manager of equity portfolios 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 declared.