Chile’s Bargain-Basement Stocks Too Good to Miss for Some

(Bloomberg) -- Chile’s fall from grace as the poster child of Latin America has come at a heavy price for equities. Some investors think it has gone too far.

Equities are trading near their biggest discount to emerging-market peers on record in terms of forward price-to-earnings after almost two years of political turmoil -- even as the economy rebounds.

Gross domestic product will jump as much as 9.5% this year, according to the central bank, the fastest pace since 1992. What’s more, copper, which accounts for more than half of Chilean exports, leaped to a record last month, before paring gains in June. For Michael Reynal, the chief investment officer at Sophus Capital in Des Moines, Iowa, that means there is renewed value in equities.

“Chile’s economy is bouncing back hard in the face of the uncertainty,” said Reynal, who oversees $3.2 billion. “Combine that with attractive valuations, and we have an attractive investment thesis.”

Flavio Kac, a portfolio manager at ASA Investments, says he favors companies in the retail and consumer space, including supermarket operator Cencosud SA, as consumer demand booms.

BTG Pactual strategists led by Alonso Aramburu recently added a Chilean utility, Aguas Andinas, to their list of recommended Andean stocks, while trimming exposure to Peru.

Political Turmoil

It’s going to take a lot to convince some investors to come back into the market, though. The biggest social unrest in a generation, the rewriting of the constitution amid the ascent of a hard-line left-wing coalition and the undermining of the private pension system have all dented confidence. Now, polls showing a Communist as a leading contender in November’s presidential elections may keep many investors on the sidelines, regardless of bargain-basement valuations.

The S&P IPSA stock index is just off its lowest valuations on record when compared with the MSCI Inc.’s benchmark for emerging market equities. Stocks are trading at a 16% discount to developing-world peers, according to relative valuation data compiled by Bloomberg.

Chile had traded at a mark-up to its emerging-economy peers for at least 13 years through 2019 as free-market policies, sustained economic growth and a stable political environment all attracted investors.

That started to change in October 2019 when a wave of violent civil unrest saw hundreds of shops looted across the country and President Sebastian Pinera called out the army to restore order.

The drawing up of a new constitution was part of a political accord to end the protests, though the demonstrations didn’t stop until the pandemic forced much of the country into lockdown last year.

What’s at Stake as Chile Writes a New Constitution: QuickTake

Equity valuations took their latest plunge in May after the ruling right-wing coalition suffered a crushing defeat in the election for the constituent assembly, placing the writing of the new charter firmly in the hands of the left wing.

“Investors need to decide whether it’s cheap for a reason,” said Morgan Harting, a senior portfolio manager at AllianceBernstein in New York. “Some investors seem to want to wait and see and may not bid the IPSA back up until they know for sure how much political change is in store.”

Others may not want to wait.

“For an investor with the conviction that the constitutional reform process will be well-received by the market and, ideally, a crystal ball saying copper prices are poised to retrace their recent highs, this would be a great time to lean into the Chilean market,” Harting said.

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