Chilean Stock Shorts Drop to Five-Year Low as Sales Surprise

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Investors are growing increasingly optimistic on Chilean stocks as they reduce to the lowest level in five years bets on a decline.

Equities are becoming more attractive as 14 companies on the equity index that have reported second-quarter sales beat estimates by an average 7.8 percent. JPMorgan Chase & Co. upgraded Chilean stocks last week to the equivalent of buy, citing attractive valuations and signs the government will soften an agenda that some investors say has stifled markets.

Short interest on stocks traded on the Santiago exchange fell 20 percent from the prior week to 42 billion pesos ($62 million) as of July 31, the largest weekly decline in two years, Tanner Investments said in an e-mailed research report to clients. The benchmark IPSA climbed 0.3 percent Tuesday, paring its drop over the past two months to 3.7 percent.

The drop in short interest “these days is a very welcome sign,” Francisco Soto, the head of equity trading at Tanner, said by e-mail.

Daily trading volume in Chilean stocks has fallen amid trading and corporate scandals, an economic slowdown and concern that President Michelle Bachelet’s economic changes will stall business growth. In 2010, the average traded volume of shares peaked at $200 million per day, while this year it has only reached $95 million, data from the Santiago stock exchange show.

Short interest is the quantity of stock that investors have sold short but not yet covered or closed out. Shorting shares refers to borrowing and selling stock with the hope of being able to repurchase it at a lower price and make a profit from the difference.