The iShares MSCI Chile Capped ETF (NYSEArca: ECH), the lone ETF dedicated to tracking equities in the world’s largest copper-producing country, has been less bad than other Latin America regional and single-country exchange traded funds this year, but that does not mean the Chile ETF is a free lunch.
At least Chilean stocks are inexpensive. As in really inexpensive. As in downright cheap compared to their Latin American peers. In fact, Chilean stocks currently traded at the biggest discounts relative to the rest of Latin America since November 2009, according to Bloomberg.
Although Chile is viewed by some market observers as the most advanced and open South American economy and it is undeniably home to Latin America’s highest sovereign credit rating (AA-), there is also no denying the country’s dependence on copper exports as a driver of government revenue. [A Chilly View on the Chile ETF]
“Copper roughly represents 40% of the country’s export revenue and minerals constitute the majority of the revenue in total,” according to Emerging Equity.
Chile is grappling with high, by its standards, inflation.
“Annual headline inflation, currently at 4.6%, has remained above the 4% mark more a year and a half, even though it’s come down from its October 2014 peak of 5.7%, and various core measures have been edging higher in recent months,” reports Dimitra DeFotis for Barron’s.
Copper is always an issue for ECH and Chilean stocks, too. When looking at ECH, the ETF’s correlation to copper prices is not readily apparent. The ETF’s materials sector weight is just 11.5%, or 650 basis points below the fund’s weight to bank stocks and well below the almost 28.5% allocated to the utilities sector. In fact, there is just one materials stock found among ECH’s top 10 holdings. However, ECH’s five-year correlation to JJC is 0.6.
“Yet monetary policy and stubborn highflation are far from Chile’s main challenges — fiscal and monetary prudence were never in question. For an economy that has undergone the bulk of the adjustment to lower terms of trade, the main near-term challenge is to provide a positive shock to confidence, which remains deeply depressed due to policy uncertainty, scandals and political polarization. Chile is right in its objective of addressing shortcomings in education and health care, thereby attempting to create a more inclusive society. Finding a broad compromise on how to best address these challenges would go a long way in starting to rebuild confidence in the policy direction,” according to a Morgan Stanley note posted by Barron’s.
iShares MSCI Chile Capped ETF
