After A Good Run In YTD 2017, Is A Peak For Chile Stocks Near? 2

Chile is the second best performing stock market in the Latin America region behind Mexico in 2017. The MSCI Chile Index has risen 14% for the year, trailing Mexico’s 19.4% return.

The iShares MSCI Chile Capped ETF (ECH) – the sole ETF traded on US exchanges which invests exclusively in Chilean equities – has risen 16% for the year. Meanwhile, Chilean equities form 35% of the portfolio of the Global X FTSE Andean 40 ETF (AND).

The ECH has been led upwards this year by the utilities, materials, and financials sectors, in that order.

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All holdings from the utilities sector have contributed positively to the fund, led by Enel Américas S.A. (ENIA) and supported by Enel Chile S.A. (ENIC) and Enel Generación Chile S.A. (EOCC).

All holdings from the materials sector have also boosted the funds performance. The sector has been led by Sociedad Química y Minera de Chile S.A. (SQM).

Meanwhile, financials have been powered by Banco Santander-Chile (BSAC).

View on Chile stocks

The Chile-listed It Now IPSA ETF has attracted inflows worth $2.5 million in YTD 2017 according to Bloomberg data. Conversely, US investors have not taken much interest in US-listed ECH, with the fund witnessing net outflows to the tune of $864,500 so far this year.

One of the reasons for the lack of interest is that the $447.5 million ECH is not quite cheap at a price-to-earnings ratio of 17.67. There are less expensive options available in Latin America such as Colombia.

Also, several brokerages have a negative view on Chilean equities.

According to Bloomberg, HSBC is keeping Chile stocks at ‘underweight’ and has liquidated LATAM Airlines Group S.A. (LFL) and reduced exposure to SQM – the now sole holding from Chile – in its model portfolio.

Meanwhile, while Itau has eliminated Chilean equities from its portfolio as it considers the market to be expensive. Citigroup has reduced its exposure to the country to ‘market weight’ citing similar reasons.

On the other hand, Morgan Stanley remains overweight on Chilean stocks as they view them to be cheap among the broader spectrum of emerging markets. Further, they believe that the election in November may lead to improved macro policy, and the political outlook is not completely priced-in yet.

Though a sell-off, especially via an ETF, may not be immediately warranted, adding exposure at this point should be done selectively.

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