Chile stocks look cheap, but political risk is rising By Reuters

By Rodrigo Campos

NEW YORK (Reuters) – Chile’s market darling status is threatened by its economic and political outlook, but investors see an opportunity as the South American country heads into a presidential election with no clear favorite while also rewriting its constitution.

Chile’s local stocks are back in the black for the year following the rise of right-wing presidential candidate Jose Antonio Kast ahead of first-round elections on Nov. 21. But the index priced in dollars is on track for a fourth straight negative yearly return.

An index of Chilean stocks traded on U.S. exchanges is nearly flat for the year.

The sharp decline in the currency is partly to blame, but the declines have come even with Chile expected to post double-digit GDP growth this year and its central bank one of the world’s most hawkish as the economy overheats.

Economists at Barclays (LON:) say no matter who wins among the top two polling candidates, Kast or leftist Gabriel Boric, the constitutional reform process “implies a likely deterioration of the country’s fundamentals.”

JPMorgan (NYSE:) research agrees, saying public sector debt levels will rise beyond their current estimates in a Kast or Boric win scenario.

“The far-left program encompasses a hefty fiscal expansion relying on what we think are too optimistic assumptions of about 40% of the planned tax collection,” Diego Pereira, chief economist for the Southern Cone & Peru at JPMorgan, said in a note.

“On the other side, the far-right candidate seems too optimistic on the ability to lower expenditure and taxes and its potential impact on economic growth, in particular given the likely mandate for increased unfunded social entitlements stemming from the Constitutional Convention.”

Chile in May elected a constitutional convention in which left, center-left and independent candidates won more than two-thirds of the seats.

The re-drafting of the Augusto Pinochet dictatorship-era constitution is expected to have an important impact on mining, likely raising taxes in the sector.

Yet this year’s rise in commodity prices, including for , Chile’s largest export, makes it an attractive destination for foreign investors. Even if prices drop from current levels, they would likely remain in an area “beneficial to countries like Chile as far as their export orientation,” according to Brian Jacobsen, senior investments strategist at Allspring Global Investments.

Despite the upcoming election adding risk to the outlook, “from our view, neither candidate really looks like a major risk to a continued economic rebound,” Jacobsen said.

“Nobody’s promising people bread and circuses.”

BUY ON THE CHEAP

In the local market, the leaders and outliers are shipping company Vapores, up near 150% year-to-date, alongside miner SQM and brewer CCU, both up just over 50% so far in 2021.

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