Is Chile investable yet?

Is the Chilean market cheap on the political scenario i.e., the leftist government and great uncertainty surrounding the not yet finished new constitution or is there something else impacting valuations?

At present the IPSA (30 most traded shares) is down 20% in the last 12 months and trading at 8.5x forward PE (consensus estimates) which is a far cry from the 15x average in the last 15 years. In fact, only 3 stocks in the index are positive, SQM and Vapores, which are up near 100% each.   

I looked at the correlation between rates and valuation to check or discard market pricing as a problem. Unfortunately, politics is not the only dilemma impacting Chile stocks. In the last 15yrs Chile has enjoyed inflation of under 3% and real rates of 1.5% that boost stock valuations (as well as real estate). Today inflation is running over 8%, headed to 10% and real rates are -2.5%, which means the CB will likely keep raising to get to positive real rates and slow demand. Consumer spending and investments are largely imported, and the economy simply needs to stop. The vast liquidity injections during the pandemic from government programs and the pension fund withdrawals has created a deep pool of cash that feeds into demand. Thus, while the market may celebrate the defeat of a very unfriendly and ungovernable new constitution, I don’t think valuations can climb back to 15x PE under current macro/inflation/rate scenario, perhaps 10x under a benign political environment.

Corporate earnings growth should be muted if the CB is to have an impact on inflation via much higher rates, consumer and investment demand should decline while wage/cost indexation impact margins.  The export sector (pulp, mining, wine, lithium) could be the exception, however they may face global demand /price issues if/when China growth slows.

Under the scenario where the new constitution is rejected or greatly modified, I would not buy the market but select just three stocks Santander, SQM and Vapores. Banks not only should see NIM rise, despite low or zero loan growth, but they also carry assets, mortgage etc. that are inflation indexed (UF). SQM on lithium and fertilizer prices and Vapores on massive discount to Hapag Lloyd shares plus large dividends.

If the new constitution is approved that is filled with citizen “free” rights (wages, housing, education, health care etc..) and loaded with political, judicial, and financial inconsistencies, not to mention an end to AFP system, then only Vapores would remain as its value is solely derived from its 30% stake in Hapag Lloyd a global container shipper.

Whats happens to the CLP? Under a mostly benign new constitution plus real rate increase and a stable copper price, the CLP could gain ground. Lower imports would also boost trade surplus. However, on a negative new constitution the risk off and capital flight plus likely higher fiscal deficits (tax and spend more) could lower it, devalue.

The Bond market has more pain to go through, between inflation and rate increases these instruments and fixed income funds, should continue with negative returns in real terms. Those indexed to UF will still have the rate risk. In the last 12 months they have fallen more than 10% in real terms. Time deposits are less attractive, they serve to park money for a short time, they are not investment instruments

In conclusion, Chile’s stock market is cheap for a few good reasons and while the key positive political driver has a due date the macro/monetary is still far from positive.

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