Chilean assets are at the mercy of Sunday’s elections

Chilean assets are bracing for a volatile week following the presidential elections that will determine whether the country continues with its free market economy or takes a left turn with more regulation and social spending.

The peso and stocks have had one of the worst performances globally in the past six months, amid mounting speculation that Gabriel Boric could win Sunday’s election and give way to higher taxes, stronger unions and the end of the private pension system.

Analysts say his victory could put further pressure on asset prices, with some projecting a further 10% drop in the stock market.

However, the triumph of conservative José Antonio Kast could have the opposite effect, as investors discount a new commitment to the economic orthodoxy that has transformed Chile in the last four decades into one of the richest countries in Latin America.

Kast’s priorities include tax cuts, fewer concessions in expanding welfare, and a smaller state apparatus.

Most polls showed Boric with a solid lead in the lead-up to the vote, although more recent polls indicated that the distance with Kast is closing. In any case, Chile faces the most polarized elections in recent times, as well as a process of drafting a new Constitution, after a period of unprecedented social unrest.

“In recent days, considering how certain assets have moved, the market has leaned more to see each candidate with a 50/50 chance of success,” said Jorge García, investment manager at brokerage Nevasa in Santiago.

The peso has weakened 14% in the past six months, the second-biggest drop among the more than 30 major currencies analyzed by Bloomberg. The S & P / CLX IPSA stock index has lost a similar amount in dollar terms during that period, making it the sixth worst performer among more than 90 global indices.

Here is a sample of what investors, analysts and economists are saying about the outlook for the Chilean markets:

Leonardo Suárez, economist at LarrainVial in Santiago:

Suarez says the peso has already discounted a Boric win, so there might not be much movement if that result is confirmed.

“If Kast wins, we could see a temporary appreciation around 800 to the dollar, after which the exchange rate could return to around 850 pesos to the dollar in early 2022 due to local institutional and political uncertainty,” he wrote in a recent note to clients.

Luis Felipe Alarcón, economist at Euroamerica in Santiago:

A Boric victory could drop the IPSA to 3,900, from the current 4,400, he projects. A Kast win could push the index to 4,900.

In the fixed-income market, 10-year government bond yields could rise as much as 120 basis points if Boric wins, and fall close to 50 basis points if the opposite scenario occurs, he said.

Caesar Maasry, analyst at Goldman Sachs Group Inc. in New York:

Chilean stock valuations have fallen too low and the IPSA is likely to rise to 4,900 in the next 12 months, according to their forecasts.

“While there is clearly great uncertainty surrounding the election results and subsequent politics, the starting point appears quite low from a valuation point of view,” he wrote in a note to clients on December 15.

Diego Celedón, analyst at JPMorgan Chase & Co. in Santiago:

The worst case scenario was ruled out after the center-right performed better in Chile’s legislative elections.

Even so, the bank maintains a neutral position on Chilean stocks due to political risks and the vote in the 2022 constitutional referendum.

A possible positive result of the elections would be a source of appreciation in the short term, but additional increases would come from the application of new policies.

Guilherme Paiva and Juan Ayala, analysts at Morgan Stanley:

The current macro framework for Chile should be maintained in 2022 regardless of who wins the race.

“In a more heterodox macro policy scenario, we would see an initial unfavorable reaction in the prices of risk assets until finally there is some moderation.”