Elections in Chile are key to market reactivation

After a year to forget, the worst seems to have passed for the battered Chilean assets.

Citigroup raised the weight recommendation from “underweight” a “neutral”After the Senate last week rejected a proposal for a fourth round of early retirement fund withdrawals and a far-right candidate took the lead in the polls for the November 21 presidential election. The market is now awaiting the election result before consolidating recent gains in currency and bonds.

“We believe investors have punished Chilean risk assets too much in the last two years and the presidential election could be the catalyst for change“Said analysts of Morgan Stanley, including Lucas Almeida, Guilherme Paiva and Juan Ayala, in a note published on November 12.

The Chilean peso posted a six-month losing streak through October, the worst drop in two decades, while government bonds denominated in pesos are down 30% this year. The vote on pensions, which blocked proposals to withdraw up to $ 20 billion from the retirement system, could be the first step in restoring stability. The presidential election could be the second.

BTG Actual said current valuations are pricing in a victory for the left, a result that is now “debatable”. In fact, the political news hit so hard earlier this year that it broke the historical correlation between the peso and copper prices, Chile’s biggest export.

There is also plenty of room for recovery for stocks. The price-earnings ratio of Chilean stocks is lower now than it was during the 2008-2009 global crisis, despite economic growth of 11.5% this year, high commodity prices, and high vaccination rates. said the analysts of BTG Actual Alonso Aramburu, César Pérez-Novoa and Daniel Guardiola in a note.

New favorite

The latest polls show an increase in support for Jose Antonio Kast, an admirer of Chile’s former military dictatorship, giving him a slight edge over the former student leader Gabriel Boric, who has the backing of left-wing groups, including the Communist Party.

If no candidate obtains at least 50% of the votes in the first electoral round, a second vote will be held on December 19. As the competition intensifies, the two candidates at the forefront of the presidential race said in a televised debate on Monday that they are open to negotiating parts of their economic programs.

However, for now, investors are simply relieved to vote against the early withdrawal of pension funds. Chileans have already drawn about $ 49 billion from their retirement savings, forcing privately managed pension funds to sell assets. A fourth withdrawal would have been another blow to the market.

Since the bill failed to pass the Senate, it turned to a mixed commission of deputies and senators to narrow their differences. Discussions must begin after the first electoral round and do not have a deadline.

The peso has recovered almost 1.8% in November, while the yield on bonds in pesos due in 2032 has dropped 38 basis points during the same period.

Change in environment

The result of the vote on the pension bill represents a “rejection of populist politics”Said Álvaro Vivanco, head of emerging markets strategy at NatWest Markets, who has taken a more constructive stance on the peso since the vote after being on the defensive for most of the year.

Both Citigroup, which previously was underweight the peso in its emerging markets portfolio, and Credit Agricole, which had a tactical long peso trade before closing it, are now becoming currency neutral.

Inflation at a 12-year high and expectations of a more aggressive monetary tightening may also boost the peso, said Olga Yangol, director of emerging markets research and strategy at Credit Agricole.

Risks persist

However, Chile continues to present risks. The rewriting of the Constitution and social spending proposals that have gained popularity since the riots in late 2019 could continue to push up local yields.

“Increased permanent spending pressures, an eroding national savings base … and an additional long-term risk premium needed to offset increased macroeconomic volatility and inflation would guarantee higher returns”Wrote Barclays strategists, including Pilar Tavella and Juan Prada, in a Nov. 5 note.

For now, however, the candidates leading the presidential race are likely to moderate their postures in the second round to gain traction among voters in the political center, analysts at Morgan Stanley said.

“More moderate discourse should create a positive environment for local actions”, Although the choice is a “Very uncertain career”analysts said in last week’s report.