Chile is a long and narrow country with an enviable macroeconomic record that probably should not be called an emerging market -- it has largely already emerged. On a purchasing power parity, Chile's GDP per capita is $15,000 while Brazil is $10,200. Argentina, the promising, yet disappointing South American former success story, has a GDP per capita of $13,800.Chile carries the strongest sovereign bond rating in South America -- AA -- because it has very little debt. The country became a net creditor nation in 2007 after years of sound macroeconomic policies, along with strong commodity prices, resulting in the amassment of offshore wealth funds.
Along those lines, Chilean exports account for more than one-fourth of GDP, with commodities making up the majority of that external trade, similar to Brazil. In fact, Chile is the world's largest copper producer, and copper provides one-third of government revenue.
Codelco (Corporación Nacional del Cobre de Chile) is Chile's major state-owned copper company. Ironically, Codelco's roots began with the nationalization of all foreign mines in Chile by the Aliende government, which was leading Chile down the path of socialism and economic decay. While Pinochet's human rights record is not exemplary, credit should be given for the sound economic policies of his government in the 1980s which started Chile on the path towards its current status of the most vibrant economy in South America. Aliende to Chile was going to be what Chavez is now to Venezuela -- popular, but ultimately a ruinous leader.
The Chilean government claims to have more bilateral or regional trade agreements than any other country. At latest count, it has 57 such agreements -- with China, India, the U.S., the E.U. and others. The government in Chile does what all Western governments should do -- accumulate surpluses in sovereign wealth funds during periods of high commodity prices and economic growth. But should disaster strike, as it did in 2008 and with the recent earthquake in Chile, only then did the Chilean government allow deficit spending to boost growth.
The size of Chile's sovereign wealth funds is substantial -- standing at $21.8 billion at last count. The two funds do not invest in equities, but are comprised like forex reserves would be treated in central bank: 66.5% in sovereign bonds, 30% in money market instruments, and 3.5% in inflation-indexed sovereign bonds. The currency composition of the funds is broken down as follows: 50% USD, 40% Euro, and 10% Japanese Yen.
Massive Earthquake, Yet All-Time Highs
The 2008 collapse in world trade caused Chile to tap its sovereign wealth fund to the tune of $4 billion. Then, just as the economy recovered, an 8.8 magnitude earthquake struck Chile in February 2010 -- one of the top-ten strongest earthquakes on record.
Spending on reconstruction efforts has caused the economy to reaccelerate to 7.1% (the earthquake caused GDP to shrink 3% in the prior quarter). And the central bank is now hiking interest rates, which shows that this was just a temporary shock to economic activity.
However, the current monetary tightening in Chile is not as aggressive as we've seen in China, and as a result the Chilean stock market is up more than 15% in 2010 -- hitting all-time highs as we speak. Some of the leading components on the market are also listed in the U.S., as you can see from the table below.
Chilean ADRs | SYMBOL | YTD %CHG | INDUSTRY |
Corpbanca | BCA | 26.04% | Banks |
Compania Cervecerias Unidas | CCU | 23.53% | Beverages |
Banco de Chile | BCH | 22.49% | Banks |
Lan Airlines | LFL | 20.94% | Travel & Leisure |
Embotelladora Andina: B-Shares | AKO.B | 16.13% | Beverages |
Embotelladora Andina: A-Shares | AKO.A | 14.69% | Beverages |
Banco Santander Chile | SAN | 13.83% | Banks |
Vina Concha y Toro | VCO | 1.82% | Beverages |
Endesa-Empresa Nacional de Electricidad | EOC | -4.30% | Electricity |
AFP Provida | PVD | -5.62% | Financial Services |
Soc. Quimica y Minera de Chile: B-Shares | SQM | -7.99% | Chemicals |
Enersis | ENI | -8.36% | Electricity |
The Chilean peso (CLP), just like the Brazilian real (BRL) and most commodity currencies, was on an appreciating trend prior to 2008. The losses on some Chilean ADRs in 2008 were also caused by the big currency swing of 429 to 682 of the USD:CLP exchange rate that year. Now, the gains are being aided by the return to normalcy of the currency, which is currently trading near 540.
Another sign of economic stability in South America is the strength of the Brazilian real, which has returned to the level of 1.75, despite spiking to 1.90 twice in 2010. This is bullish for commodity-oriented economies in the region because the real -- or the reais as the call it in Brazil -- remains a reliable indicator of the strength in the natural resource markets and the overall regional economy.
In rapidly developing economies that are driven by sound macroeconomic policies, banks are often the best-performing stocks. We have three choices: Corpbanca (NYSE: BCA),Banco de Chile (NYSE: BCH) and Banco Santander Chile (NYSE: SAN). Corpbanca is the smallest of the three, but is the oldest bank in Chile and trades at the cheapest price-to-book multiple of 2.8.
Chile has a longer record of sound macroeconomic policies than Brazil, even though Brazil has clearly learned its lesson. As both economies are driven by the demand for natural resources emanating from Asia as well as growing domestic demand, the best days for Chile are ahead of it.
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