Mercado puts all the chips in the new chief of the Treasury in Chile

The day before former student leader Gabriel Boric becomes Chile’s next president, analysts are taking the arrival of the most leftist government in 50 years in stride. The reason is the incoming finance minister, Mario Marcel.

The former central bank president was chosen by Boric to ensure fiscal stability as the government prepares to push through a series of health, education and labor reforms aimed at reducing inequality.

“Marcel not only has the technical knowledge for the challenge and is one of the fathers of the fiscal rule, that is, it is his expertise, but he also has political management” to resist the most populist demands, he said claudia sotzchief economist at Tanner Financial Servicesin the most recentChile Market Chat” hosted by Bloomberg.

That confidence is evident in the fixed income market. In October, the yield on bonds in pesos due in 2032 rose to 6.9%, as investors viewed Boric as a threat to the fiscal prudence that has characterized Chile for more than three decades.

Since then, the yield has slipped to 5.82%, even as the war in Ukraine is driving up commodity prices and adding to inflationary pressures. In contrast, yields on Chilean dollar bonds have gone in the opposite direction.

“We are convinced that Marcel will be able to manage all the demands that there are, with a sense of reality“, said Rodrigo Ibanezdeputy investment manager Banchile General Fund Administrator. “Many of the fears in local fixed income were very well expressed as of September of last year, and a catastrophic scenario was internalized, which apparently would not be that negative”.

As a result, Chile’s local fixed income has become the safe-haven asset it once was, Ibáñez said.

the ukrainian war

Internal concern has given way to concern about the impact of the war on Ukraine and the rebound in commodity prices.

“What keeps me up at night is being able to gauge the impact of all the sanctions on Russia and Putin’s military advance in Ukraine.” said Sotz. “The impact of this on the local economy goes directly through commodities with a very inflationary scenario.”.

While local consumers, flush with money from pension fund withdrawals, pushed up prices six months ago, global commodity costs are now the main concern, he said.

“If the international scenario worsens and spreads, it is most likely that the central bank will have to raise the rate more stronglySotz noted.

With local bonds trading at fair value, inflationary pressures indicate there is one asset that could gain: the Chilean peso. With a higher monetary policy rate, the peso could strengthen to around 780 or 770 per dollar, he said. Sotz.

“We should have a trend of appreciation in the medium and long term rather than depreciation“, said.

Other key points

• Investment strategy:

“We are overweighting UF bonds over nominal bonds more than the market in general, and focusing on sovereign and ‘AAA’ bonds, due to their liquidityIbanez said.

Banchile lowered the exposure to local equities to “neutral” from “overweight” and has invested in raw materials through ETFs: Ibáñez

“The biggest challenge for Rosanna Costa is to calibrate imported inflation and lower growth in the MPR. In addition, everything that is being discussed in the Constitutional Convention regarding the independence and functions of the bank adds pepper”: Sotz

“We are looking at how likely this scenario of global stagflation becomes, which a few months ago was very timid, but today it is taking on more and more prominence.”: Ibanez

“If the price of copper is maintained at these levels, it means an extra income in the fiscal accounts that was not taken into account. But in terms of trade, the price of copper is not enough to compensate for the rise in oil”: Sotz