Copper to Lead Struggling Chilean Equities Lower
Chile is more than a copper mine, of course, but the metal has dominated the country's export market for years. Now the future for both the commodity and the stocks it supports looks bumpy.
Even if you are not, you have to marvel at how Chile's citizens will be returning leftward-leaning Michelle Bachelet to the presidency next month, and how Chile's central bank has felt it necessary to cut its base lending rate at each of its last two meetings in an effort to "stimulate" the woebegone Chilean stock market and the languishing Chilean peso (CLP). The MSCI-Barra Chilean index, accessible to you via the iShares MSCI Chile Capped Equity Fund (NYSEARCA:ECH) has declined almost 19.8% in USD terms so far in 2013.
Lower interest rates in Chile are a double-edged sword. The average annual interest rate spread between Chile and the US has been 4.35% during the entirety of the post-QE2 era going back to the Jackson Hole meeting in August 2010. This spread acted to maintain the spot CLP up until April 2013, at which point rising expectations for a change in US monetary policy overwhelmed the interest rate spread and reduced the carry return for borrowing dollars and lending pesos. Chilean relative performance, already on the ropes, broke even further and faster.
The hope, and "hope" is a word investors should use sparingly if at all, is that lower interest rates will arrest some of the decline in Chile's relative performance and induce fund inflows into Chile. Markets will require time to judge the direction of the incoming Bachelet administration and any investment decisions made in relation to Chile will have to be made in comparison to global alternatives.
Chile is more than a copper mine, of course, but the metal has dominated Chile's export mix for years. The CLP has been able to move independently of copper prices since the aftermath of the financial crisis. Moreover, the massive downturn in Chilean relative performance has exceeded the softness in copper prices significantly in 2013. If the total return on the Dow Jones-UBS Copper Subindex (NYSEARCA:JJC) has been -33% since February 2011, blame a slowdown in Chinese imports and mine capacity expansions more than anything related specifically to Chile. However, markets do look forward, more or less, and it is unlikely that Chilean equities would be underperforming so badly without some anticipation of lower copper prices.
The resource cycle always peaks with overcapacity and this always takes years to be absorbed. The case will be no different for copper, with negative implications for Chilean equities.
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.
Copyright 2011 Minyanville Media, Inc. All Rights Reserved.