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Markets In-Depth December 15, 2021

In this Issue

04 Investment
Chile: Prepare For A Boric Win
Recommendations
• Odds favor left-wing candidate Gabriel
CHART 1
Boric to win the second round of this
Chilean Stocks: New Lows Ahead?
weekend’s presidential elections.
4000 STOCK PRICES 4000
• If this scenario takes place, Chilean IN LOCAL CURRENCY*
3600 3600
equities and the currency will sell off
considerably. 3200 3200

• Nevertheless, once the dust settles, 2800 2800

a buying opportunity might emerge

2400 2400
in Chile. Political volatility will be
contained and congress will push back
2000 CHILE: 2000
on extreme policies.
3-YEAR MOVING AVERAGE
6-YEAR MOVING AVERAGE
8 8
Since late 2019, we have been arguing 7 7
that Chile will undergo a leftward shift 6 6

in domestic politics and policies. Major 5 5

outcomes of this transformation would
4 4
entail permanently larger social spending
and higher taxes for top earners and 3 STOCK PRICES IN US$* 3

Editorial Board
businesses.

Arthur Budaghyan Gabriel Boric, the left-wing candidate in

USD/ USD/
Chief Emerging the presidential elections on December CLP CLP
Markets Strategist
19, represents this change. The opposing 500 CLP vs. USD 500
Rajeeb Pramanik
Senior EM Strategist
candidate, José Antonio Kast, embodies a 550 550

Andrija Vesic
conservative backlash against the country’s 600 600
Associate Editor progressive wave of the last two years. 650 650
Juan Egaña 700 700
Research Analyst Odds favor Boric’s victory in the second
750 750
Ellen JingYuan He round of this weekend’s presidential
800 800
Associate Vice President elections. Chilean equities and the currency 850 2021 850
Roukaya Ibrahim will sell off considerably if Boric wins, as we
2010 2012 2014 2016 2018 2020
Editor/Strategist expect (Chart 1). *SOURCE: REFINITIV DATASTREAM WORLDSCOPE

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Emerging Markets In-Depth December 15, 2021 02
Markets Chile: Prepare For A Boric Win
Strategy

CHART 2 CHART 3
Chile: Boric Has A Healthy Advantage The Wages-Profit Mix Is More Unequal
To Win The Election In Chile Than In The US
45
% % of % of
GDP GDP
SECOND ROUND VOTING INTENTIONS* 54 CHILE* 54
40 (AS A % OF TOTAL VOTES)

50 50
35 10%

46 Chile: 46
30 wages < profits

42 42
25

38 38
20

34 34
15
NATIONAL INCOME AS A % OF GDP:
% of EMPLOYEE COMPENSATION % of
10 GDP OPERATING PROFITS GDP

55 55
5
50 50
2021 US
45 45
0
GABRIEL BORIC JOSÉ ANTONIO NULL/ US:
KAST UNKNOWN/ 40 40
wages > profits
WILL NOT VOTE
*AVERAGE OF CADEM AND ACTIVA POLLS, CONDUCTED BETWEEN NOVEMBER 35 35
30TH-DECEMBER 2ND AND NOVEMBER 23-26, RESPECTIVELY.
30 30

25 25
Chart 2 shows that Boric has a comfortable
lead of more than 10 percentage points over 20
2021
20

Kast based on the polling from local firms.

1996 2000 2004 2008 2012 2016 2020
The key reason that Boric will likely win *SHOWN AS A 6-MONTH MOVING AVERAGE;
the election, despite trailing Kast in the first SOURCE: BANCO CENTRAL DE CHILE

round, is that he will attract centrist and

undecided voters:
The country’s leftward shift in the
• As stated above, Boric’s policies largely past two years has its bases in Chile’s
represent protesters’ demands from profound socioeconomic disparities.
the 2019-2020 uprisings: creating a Chart 3 shows the shares of wages
public pension system, higher social and profits in national income. Even
spending on education and healthcare, compared to an unequal US, Chile’s
and higher taxes for top earners and income distribution is much more
large corporations. The fact that uneven. We elaborated on the underlying
Chile overwhelmingly voted for a new causes and structural reasons for the
constitution earlier this year (at 78% of nationwide protests in our December 5,
total votes) favors Boric over Kast. 2019 Special Report.

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Emerging Markets In-Depth December 15, 2021 03
Markets Chile: Prepare For A Boric Win
Strategy

• Over the past few weeks, Boric has been voters identify with right or center right
distancing himself from the communist policies, and 18.8% identify with the left
party and adopting more pragmatic or center left.
policies. This includes condemning
• Critically, Boric leads Kast in three out of
autocratic leftist regimes in Latin
the top four key issues affecting voters:
America and embracing a hardline stance
social rights (health, education and
against drug-related violence and illegal
housing), pension reform and women’s
immigration/refugees.
inequality.
Further, he has sought to calm the inves-
Kast has projected himself as the
tor and business communities by signal-
candidate for economic growth.
ing fiscal prudence in 2022. He has modi-
However, the latest poll from Cadem
fied his economic plan to enact reforms
shows that 75% of businesses and
– such as a higher minimum wage,
65% of individuals are satisfied or
increasing tax collection and raising taxes
very satisfied with their economic
for high earners and mining companies
situation, the highest level since 2017.
– in a gradual manner over four years and
This favors Boric’s agenda as voters are
has promised to stabilize the public debt-
currently more concerned with income
to-GDP by the end of his term.
redistribution than with pro-growth
• According to the latest polls from Cadem policies.
and Activa, centrist and independent
On the whole, Chilean share prices and the
voters prefer Boric over Kast by a
exchange rate are set to tumble as Boric
margin of seven percentage points.
emerges as the winner of the second round
This is critical as 66% of the electorate
of presidential elections. The bounce in
either identifies as being centrist or
Chilean stocks following Kast’s lead over
independent.
Boric in the first round has faded in the past
This also means Boric can take a large weeks (Chart 1 above). Odds are that share
share of the vote from Franco Parisi, prices and the peso will drop to new lows.
an independent centrist presidential
Chilean equities will continue de-rating as
candidate who came in third in the
Boric’s victory entails less business-friendly
first round with 13% of the vote (this
policies. Further, the peso will continue
compares with 28% for Kast and 26% for
depreciating due to capital outflows from
Boric). How Parisi’s first round votes are
high-net worth individuals and businesses.
split will be critical to the outcome of the
In addition, business confidence will
second round. The Cadem poll shows
plummet, negatively affecting investment
that 45% of Parisi’s base intends to vote
and hiring.
for Boric, compared to just 18% for Kast.
Hence, this supports Boric’s significant Once the dust settles, however, a buying
advantage over Kast in the second round. opportunity might emerge in Chile. We
have long argued that Chile will shift to
Further, Boric’s ideological base is larger
a welfare state model (as in Canada and
than Kast’s: approximately 15.6% of
Northern Europe) and not towards fiscal

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Daniel Soto SURA ASSET MANAGEMENT S.A. 753323

Emerging Markets In-Depth December 15, 2021 04
Markets Chile: Prepare For A Boric Win
Strategy

profligacy and heightened regulations like

CHART 4
in neighboring Argentina. Boric’s latest shift
Chilean Equity Valuations Are Low,
to the center and the fragmented nature But Could Undershoot
of congress (which will force negotiations
and prevent extreme policy outcomes) CHILE*
corroborate this thesis.
30 30
Further, his election would ensure medium-
term stability. Chile needs to undertake
25 25
income and wealth redistribution policies
now to prevent further political volatility
20 20
and violence. If it fails to do so, the outcome
could be more protests and heightened Mean
15 15
political volatility.

Bottom Line: Prepare for a Boric win in the 10 10

second round of the presidential elections,

which will be negative for Chilean financial 5 5
CYCLICALLY-ADJUSTED P/E RATIO
markets. That said, a major setback in
+/- ONE/TWO
Chile's risk assets will likely lead us to STANDARD DEVIATION
re-evaluate our stance on Chilean markets.

1.3 1.3

Investment Recommendations
1.1 1.1
• For now, we recommend that investors
continue underweighting Chilean
.9 .9
equities within an EM portfolio. While Mean
Chilean stocks are somewhat cheap in
absolute and relative terms according .7 .7

to the cyclically-adjusted P/E ratio CHILE* RELATIVE TO

EMERGING MARKETS**
(Chart 4), we will await a better entry .5 .5

point. 2021

• We also reiterate our short CLP versus 1990 1995 2000 2005 2010 2015 2020

the US dollar position. The Chilean *CALCULATED USING CHILE STOCK PRICES AND EPS IN LOCAL
CURRENCY TERMS, AND THEN DEFLATING BY LOCAL CONSUMER PRICE
peso's valuation is neutral, not cheap INFLATION; SOURCE: MSCI Inc. (SEE COPYRIGHT DECLARATION)
**CALCULATED USING US$ STOCK PRICES AND US INFLATION
(Chart 5). Additionally, besides political
risk and domestic capital outflows, • In terms of local rates, we believe the
external factors such as a slowdown central bank will continue its hiking
in China’s old economy (in the form of cycle into the new year. Chile has been
weaker copper prices) and a stronger hit by its highest inflation prints in over a
dollar will be headwinds for the currency. decade, with headline and core measures

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Daniel Soto SURA ASSET MANAGEMENT S.A. 753323

Emerging Markets In-Depth December 15, 2021 05
Markets Chile: Prepare For A Boric Win
Strategy

CHART 5 CHART 6
The Chilean Peso's Valuation Is Neutral Chile: Inflation Must Be Curtailed With
More Rate Hikes
% %

CHILE:
6 Overshooting! 6
REAL EFFECTIVE EXCHANGE
110 110
RATE*:
5 5
(BASED ON UNIT LABOR
105 COSTS) 105
4 4

100
Mean 100 3 3

Close CB's
2 2
95 to fair 95 target
value
1 1
90 90
CONSUMER PRICE INFLATION:
+/- ONE/TWO 0 0
HEADLINE
STANDARD CORE
85 DEVIATION 85 -1 -1

CHILE:
80 80 Ann% Ann%
Chg Chg
7 7
2021

Rising wages
1996 2000 2004 2008 2012 2016 2020 are feeding
SOURCE: OECD 6 6
into inflation

5 5
at 6.7% and 5.8% respectively (Chart 6,
top panel). Further, nominal wage growth
remains at a healthy 6%, the highest in 4 4

over five years (Chart 6, bottom panel).

In addition, fiscal policy was among the 3 NOMINAL HOURLY WAGE INDEX* 3

most expansive in the EM space this year 2021

and bank credit is growing at a healthy
2010 2012 2014 2016 2018 2020
pace. All in all, the central bank will *SHOWN AS A 3-MONTH MOVING AVERAGE
continue pushing rates above the neutral
range of 3.25%-3.75%.
considerable pushback from congress.
That being said, while we are betting on Besides, weak capital spending and
rising interest rates, we recommend that hiring will cap inflationary pressures.
investors maintain a neutral allocation Overall, Chilean local currency bonds
to domestic bonds and an overweight might not underperform their EM peers
allocation to sovereign credit within substantially.
their respective EM portfolios. Public
debt remains at a minimal 33% of GDP, Juan Egaña
and while Boric is advocating for larger Research Analyst
fiscal spending, he will encounter juane@bcaresearch.com

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Daniel Soto SURA ASSET MANAGEMENT S.A. 753323

Emerging Markets In-Depth December 15, 2021 06
Markets Chile: Prepare For A Boric Win
Strategy

Archive Of Previous Reports

Please click on the links below to view reports:

1. Indian Stocks: Awaiting A Better Entry Point - December 9, 2021

2. Turkey: Authorities Are Defying Reality - December 2, 2021
3. Indonesia: Fade The Rebound - November 25, 2021
4. Mexico: Is Inflation Here To Stay? - November 16, 2021
5. The Philippines Will Benefit As A Defensive Market - November 11, 2021
6. Brazil: The Wheels Are Coming Off - October 26, 2021
7. Chile: Navigating Through Election Turbulence - October 21, 2021
8. Bangladeshi Equities: Buy On Dips - October 21, 2021
9. Book Profits On Indian Stocks, For Now - October 7, 2021
10. Kenya: Hampered By Fiscal Austerity & Political Volatility - September 30, 2021
11. Egypt: Currency Devaluation Delayed, For Now - September 30, 2021
12. Can Inflation Upset The Indian Applecart? - September 9, 2021
13. What Clients Are Asking - September 2, 2021
14. Peru: Approaching A Boiling Point - August 26, 2021
15. Thailand: Stay Short The Baht - August 19, 2021
16. Turkey: Is It Different This Time? - August 13, 2021
17. Chinese TMT Stocks: A Bad Dream Or A New Reality? - August 5, 2021
18. Malaysia: Favor Bonds, Not Stocks - July 29, 2021
19. Can Brazil Break Out Of A Vicious Circle? - July 8, 2021
20. South Africa: Unintended Consequences Of Currency Appreciation - July 1, 2021
21. The Rupee Has A Tailwind, And Bonds Offer Good Value - June 23, 2021
22. Colombia: Is A Political Shift To The Left Coming? - June 14, 2021
23. Strategy For Korean Equities - June 10, 2021
24. An Inflationary Brew In The Hungarian & Czech Economies - June 3, 2021
25. Indonesia: Stay Bond Bullish, Stock Bearish - May 24, 2021

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Daniel Soto SURA ASSET MANAGEMENT S.A. 753323

 Emerging Markets In-Depth December 15, 2021 07
Markets Chile: Prepare For A Boric Win
Strategy

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