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This is How Chile has Outperformed Other Emerging Markets and the S&P 500 this Year

For the most part, stocks around the world have taken a beating this year. But there is a corner of the global market that opposes this trend: Chile.

Chilean stocks this year are outperforming those of other countries, including the US.

The iShares MSCI Chile exchange-traded fund (ECH) is up more than 3% so far this year, while the US benchmark S&P 500 index is down more than 20%, officially trading in a bear market.

The S&P IPSA, an index that tracks the largest and most liquid stocks listed on the Santiago Stock Exchange, is up 8.2% in 2022.

Stocks in Chile are also outperforming broader emerging markets. The iShares MSCI Emerging Market ETF (EEM) is down more than 28% for the year.

There are several catalysts contributing to the outperformance in the South American country, one of the most recent being the rejection last month of a proposed new constitution that would have represented a deeper shift to the left under President Gabriel Boric, away from the free-for-all model. market that has defined Chile for decades.

“As it became clearer since the beginning of this year that the population is not going to support the draft of that constitution, the markets have performed very well,” Arthur said.

Budaghyan, emerging markets strategist at BCA Research. “And we believe that is the main reason behind this rebound.”

The advance of raw materials

There is another reason why Chilean stocks have outperformed: higher commodity prices.

A look inside the ECH shows that an overweight allocation to commodities helped the ETF this year, even as rising interest rates hit emerging markets across the board. As of October, materials stocks made up about 30% of the ECH ETF, which has 25 holdings.

The top holding is Sociedad Química Y Minera De Chile. It is a major lithium producer holding 24.2% of the ETF that enjoyed the surge in prices this year. According to Benchmark Minerals, lithium prices increased by 123% in 2022. Consequently, Society has rebounded by 71% so far this year.

“The Chilean market is very tied to commodity performance,” said Andrew Daniels, associate director of equity strategies at Morningstar. “In general, you will see the market do well when commodities do well, and you will see the market do not do well when commodities falter.”

The increase in raw material prices also benefited other Latin American countries, such as Brazil.

Get exposure to Chile

Gaining direct exposure to Chilean stocks is a challenge for most U.S. investors as the country, like other emerging markets, has higher volatility and deeper liquidity problems. BCA’s Budaghyan said most of the rally is limited to large-cap stocks, likely driven by buying by foreign investors.

“It’s not developed to the same degree,” Daniels said. “There aren’t that many public companies on the stock market.”

Aside from the iShares MSCI Chile ETF, which helps investors gain exposure to the total addressable market, Chile represents only a small portion of other funds. The country comprises just 0.2% of Morningstar’s global markets index, for example, and only about 0.6% of its emerging markets index.

Even the T. Rowe Price Latin America fund, which has a four-star rating on Morningstar, has only a 2.3% allocation to Chile in the entire portfolio.

Daniels advised investors to stay diversified and cautioned against allocating directly to the country. “Focus on gaining exposure to broader mandates, such as the emerging markets option, where the manager can be trusted to navigate those markets appropriately over a full market cycle,” he said.

‘The market of stock pickers’ dreams’

 Still, investors could benefit from greater exposure to Chilean stocks.

“We think it’s like a stock picker’s dream market,” said Richard Cook, portfolio manager at Cook & Bynum Capital Management, calling it “a fantastic place for a good fundamental stock picker to look to see if they might have access”.

Cook said he is optimistic about investing in the country, where he began taking research trips in 2009. As a concentrated value investor, he is particularly interested in small-cap stocks, rather than the commodity companies that ETFs support. of Chile are very exposed, to identify differentiated opportunities. Cook said his company manages about $250 million in assets.

Without a doubt, Cook said that investing in Chile is not for everyone. Someone who wants to invest in the market will have to consider a long-term horizon in case liquidity problems or macroeconomic or political shocks sour short-term investments.

They must also thoroughly investigate opportunities on the ground. Cook said his fund currently has eight holdings, with only one position in Chile—a highly concentrated portfolio that could mean more volatility for investors.

“I think if you’re going to express it, it should probably be in a relatively more concentrated way,” he said. “Because otherwise, you’re just indexing. I don’t think you should pay active managers to index for you.”

Whats Next?

For macro investors, Chile is one of the interesting countries to implement in the emerging market universe, according to Budaghyan of BCA Research.

However, investors should be wary of potential challenges on the horizon as global markets grapple with the fallout from rising inflation and rate hike campaigns undertaken by central banks around the world. BCA predicts that corporate profits in Chile will begin to contract.

“Domestically, we have a very negative earnings outlook, and I think that will be important in the coming months until the end of this year, so the market is likely to go down until the end of this year,” Budaghyan said. “But for next year, the market will already be pricing in a lot of earnings recession, the central bank will become dovish, interest rates will go down next year and it’s positive for the market.”

“Chilean stocks are reasonably cheap. Therefore, if they weaken in the coming months, they will provide good value for next year,” he added.

Source : CNBC