Good streak of Chilean assets at the mercy of the future cabinet

Chilean assets have had an outstanding start to the year. Whether this streak continues in the coming weeks will depend on just one thing: whose president-elect, Gabriel Boric, name as his finance minister.

Investors and traders have speculated for weeks on who will be the person who will lead economic policy, including the current president of the Central Bank of Chile, Mario Marcel, and former regulators such as Guillermo Larraín.

For now, optimism persists that the former student leader, who moderated his speech after the December 19 elections, will now name a fiscally prudent finance minister. The Chilean peso is the world’s best performing currency so far this year, up 5.2%, while the benchmark IPSA stock index is up 9.2% measured in dollars.

“Some believe that Mario Marcel has a good chance,” said Felipe Alarcón, chief economist at EuroAmerica. “That would be incredible. The market would celebrate a name like that very much.”

Alarcón was one of the three analysts who participated in the “Chile Market Chat” organized by Bloomberg News. The other guests were:

• Carolina Ratto, head of the stock studies area at Credicorp Capital
• Daniel Soto, head of investment strategy at SURA Asset Management

“We will continue to see good results in local assets while all this moderation in Boric’s speech materializes in the cabinet,” Soto said.

It’s easy to see why Marcel, 62, would be popular in the market. He has been president of the central bank since 2016 and a member of its board since 2015. Before that he was the government’s budget director and also worked at the World Bank.

Although Marcel is close to the Socialist Party, he has also been critical of early withdrawals from pension funds and has supported the autonomy of the monetary authority at a time when Chile is drafting a new constitution. He has a master’s degree in economics from the University of Cambridge.

While many local investors are in a “wait and see” position on the cabinet, foreigners have already started buying assets, Ratto said.

“Many foreigners are wondering if in the end Chile will be like Peru, where the market was very negative with the election of Pedro Castillo and then had a huge recovery because many of the reforms that they wanted to implement were made difficult by the counterweight of Congress” Ratto said.

Other key points

Investment Strategy:

• “We are following a very cautious strategy, we try to weight stocks that are not so impacted by news on the regulatory front,” Ratto said. Credicorp likes the retail sector, prioritizing Cencosud’s actions
• “There is a certain possibility that the exchange rate will hit a pass under the CLP800, especially if the voracity due to the weight of non-residents continues,” said Alarcón
• Local shares are cheap because they were excessively punished during the electoral campaign, but other factors such as monetary and fiscal policy, a possible economic recession and the Constitutional Convention have Sura with a “neutral” position on the IPSA, Soto said.

  Local fixed income should have a better year than in 2021, with positive returns, “due to the lower probabilities of withdrawal from pension funds and considering that the fundamentals tell you of a ‘fair value’ lower in rates,” he said. Soto

Constitutional Convention:

• All three agreed that the body in charge of rewriting the nation’s Constitution will fuel uncertainty this year.
• “What has given the market some peace of mind is a balanced Congress, and if the Convention changed the bicameral system to a unicameral one, which also implied a new Congress election, that would be the worst scenario of all,” Ratto said.
• Alarcón foresees a fairly broad consensus on the autonomy of the Central Bank within the Convention, but what is still of concern would be a change to a unicameral Congress
• Soto is closely monitoring how far the Convention goes with environmental initiatives. “There is a kind of ‘ecological radicalism’ that could lead to a decline in foreign direct investment, hitting growth”

Risks on the international front:

• The risk with the Fed is that it becomes more ‘hawkish’ than its members have indicated in recent weeks, according to the three analysts.
• More bottlenecks caused by China’s strict anti-Covid policy could trigger a global slowdown and catch the Fed in the middle of a rate hike, Alarcon said.
• If Brazil does poorly, that affects all of Latin America, because the allocation of emerging market funds is highly dependent on Brazil, with the potential to restrict flows to the rest of the region, Ratto said.