Chile: Not Just a Copper Play
Chile might have a perception problem. As the world's largest copper-producing nation, it is easy to understand why most foreign investors perceive Chile as a materials play. That perception problem extends to investors assuming that the health of Chilean equities is intimately correlated to Chinese copper demand.
To some investors, it might be hard to fathom that Chile is a valid investment thesis at a time when concern is elevated that the Chinese economy is headed for a hard landing. Along those lines, it is worth noting that iShares MSCI Chile Investable Market Index Fund (NYSE: ECH) allocates just under 16 percent of its sector weight to materials names, making the group just the fourth-largest sector allocation in the ETF behind utilities, industrials and financials.
ECH's sector weights aside, the treatment of Chile as a materials play is a fact of life, but there is much more to the Chilean investment thesis.
"With Chile being the world's largest copper producer it is obviously be a materials play, especially with the state owned copper company CODELCO being the largest copper company in the world," said Medellin-based independent analyst Caiman Valores in an e-mail exchange with Benzinga. "There is the fact that Chile has the most advanced/mature economy in Latin America combined with the most stable political environment coupled with the lowest corruption indicators. All of which point to Chile being one of the most advanced of the emerging market economies available to investors."
There is something to be said for Chile's status as a mature emerging market. The central bank raised its 2012 GDP growth forecast to 4.75 percent to five percent from a previous estimate of growth of four percent to five percent. This year's inflation estimate was reduced and the 2013 GDP growth estimate is also four to five percent.
While it is fair to say Chile's economy is export dependent, domestic demand has been improving, helping Chile endure the global slowdown better than some of its South American peers. The proof is in the performance of ECH compared to other relevant ETFs.
Year-to-date, ECH has gained almost 4.6 percent, an impressive move considering the iShares FTSE China 25 Index Fund (NYSE: FXI) is off 6.2 percent. ECH has also easily trounced the performances of the Global X FTSE Argentina 20 ETF (NYSE: ARGT) and the iShares MSCI Brazil Index Fund (NYSE: EWZ).
Chile also has an under-appreciated weapon to keep its economy stable: A $15 billion sovereign wealth fund.
"Investors don't think about them (sovereign wealth funds) but they provide an important back stop," Valores said. "Plus it provides an important tool for smoothing out the economic cycle, boost mining royalties during the peak demand with the additional funds going into the sovereign wealth fund and wind them down when demand falls."
Another feather in Chile's cap, and this theme can be easily accessed through ECH, is a steady, vibrant banking sector. ECH devotes over 17 percent of its weight to financial services names.
Chile's banking sector "is well regulated and highly profitable, with some of the best banks in Latin America along with an emerging wealth management and insurance industry," said Valores. " This in combination with the merger of the Chilean, Colombian and Peruvian exchanges creates some mind-boggling possibilities around investments, wealth management, investment banking, etc."
When those exchanges combined, the Mercado Integrado Latino Americano, or MILA Exchange, was formed. Investors can gain combination exposure to Chile, Colombia and Peru through the Global X FTSE Andean 40 ETF (NYSE: AND). AND has been one of the steadier multi-country Latin America ETFs in 2012 and Chile accounts for about half of the fund's country weight.
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