“Switzerland Of Latin America” – Insight Into Chile Economy And ETFs

Santiago, Capital of Chile.

Chile is one of the most exciting investment destinations in Latin America. The country is very well developed  in relation to the other nations of the continent. It’s a big producer of copper as it delivers more than a third of the world’s copper producion. Although it is more costly compared to many other copper-producing nations, Chile remains an extremely attractive proposal. It has some of the easiest-to-access copper mines in the world. The country has been politically stable for a relatively long period of time. Also good corporate governance where the rule of law works continues to attract investments.

Copper roughly represents 40% of the country’s export revenue and minerals constitute the majority of the revenue in total. The leaders of the country recently started implementing initiatives to make the economy less dependent on it in order to diversify the revenue sources.

Chile’s exports in 1950-2007. Courtesy of Wikipedia

Graphical depiction of Chile’s product exports in 28 color-coded categories. Courtesy of Wikipedia.

According to the CIA World Factbook, Chile’s “sound economic policies,” maintained consistently since the 1980s, “have contributed to steady economic growth in Chile and have more than halved poverty rates”. If you look at the GDP per capita chart attached below, the dynamics of the country’s growth rapidly accelerated in the 1980s leaving the average Latin America growth behind.

Chilean (blue) and average Latin American (orange) GDP per capita (1950–2007). Courtesy of Wikipedia.

Michelle Bachelet, President of Chile. Courtesy of Wikipedia.

Following The Economist, according to Michelle Bachelet, president of Chile, the coming year 2015 will provide a test of the global community to commit themselves to the developments leading to greater equality. This clearly implies social policies that allow increased access to opportunities for everyone.

President Bachelet has made the social security and equality one of the major priorities of the political program. In 2015 Chile will undertake reform aimed at achieving high-quality, free and integrated education at all levels. To be sure, this is a goal associated with social, human and political development. It is a major prerequisite for economic development, as it places the knowledge and abilities that people possess at the centre of Chile’s growth. Bachelet has been fighting to make better democracy for all with this very strong social accent.

President Michelle Bachelet has market her strong presence during the latest Asia-Pacific Economic Cooperation (APEC) forum in Beijing. She presented the advantages of Chile economy in a bid to secure a share of the $1.25T in offshore investment laid out by Xi Jinping, China’s president.

During talks with the Chinese leader, Bachelet referred to Chinese investment in Chile as a “pending challenge” and indicated infrastructure investments as a priority.

“Today, we invite you to continue investing in our country, and we know infrastructure is one of the many important areas” Bachelet told leaders during the Investing in Chile seminar. “We want to improve the quality and quantity of public projects to benefit the community, therefore we want to further promote investment in this field through an attractive system that safeguards concessions.” noted The Santiago Times.

Many refer to Chile as “Switzerland of  Latin America”. Political stability together with sustainable economic growth and vision for the future country development make this country a popular investment destination. U.S. investors can easily gain exposure to the Chilean stock market via the iShares MSCI Chile Capped ETF (ECH). As of November, 13th the fund held $373M assets under management (AUM). The ETF charges 0.61% of expense ratio annually.

According to iShares the ECH seeks to track the investment results of a broad-based index composed of Chilean equities. On the sector level the Chilean ETF allocates around 26% towards utilities while roughly 70% of its assets towards combined utilities, financials, consumer discretionary and materials.

ECH Sector Exposure; courtesy of iShares

The Chile ETF is fairly concentrated. It holds 39 underlying companies and the top 5 make up almost 40% of the portfolio.

ECH Top 5 Holdings; courtesy of iShares

The iShares Chile ETF has been in a long-term negative trend, however this year it encountered a solid support level at around $41. If it breaks above the negative trend resistance line that potentially could mean a reversal of the long term negative tendency. On the other hand, if the ETF breaks below the level of $41 it may continue making new low levels.

ECH 3Y Performance – courtesy of StockCharts

During the period of time between March 2013 and September 2014 the ECH had been consistently underperforming the iShares Latin America 40 ETF. However, since September this year the ECH vs. ILF ratio changed the direction and broke all crucial resistance levels including the 200d moving average. For Latin America investors it could be a sign to overweight the country relative to the underlying benchmark allocations.

Here is the chart presenting the ECH vs. ILF ratio. As a reminder, a rising price ratio means the numerator/ECH is outpeforming (up more / down less) the denominator/ILF.

ECH vs. ILF relative performance; courtesy of StockCharts

An alternative way for the U.S. investors to gain substantial exposure to Chile is the Guggenheim Frontier Markets ETF (FRN) which allocates around 38% to the Latin America country. At this point it’s worth noting that Chile is classified as an emerging market according to the MSCI methodology, therefore the name of the Guggenheim product could be misleading to some investors.

FRN Country Split; courtesy of Guggenheim

As of November, 13th the FRN was just below $80M in size and charging 0.71% of expense ratio.

ETFs: ECH, ILF, FRN

Source: The Santiago Times, The Economist, Wikipedia, iShares, Guggenheim

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