Tapping Into Brazil's Stock Rally Without Taking on All the Risk

  • Investors use Chilean stocks to boost exposure to Brazil
  • Chile index also benefits from Argentina, Peru elections

The Santiago skyline.

Photographer: Morten Andersen/Bloomberg

Anyone who’s ventured into Latin American equity markets in the past year knows that doing so during times of political turmoil requires a healthy appetite for risk. Stock indexes in Peru and Brazil are posting the world’s biggest gains this year, but they’re also among the most volatile.

There’s another way to ride the rally, minus the whiplash: Go to Chile.

Companies in this sliver of a nation sell everything from bottles to pulp to T-shirts across Latin America. That makes Chile’s benchmark index a surrogate for investors who want to benefit from optimism that an upcoming presidential election in Peru, a new head-of-state in Argentina and the possible ouster of Brazil’s leader will usher in more market-friendly governments. Nineteen of the 40 stocks on Chile’s IPSA get at least some of their revenue from one of the three nations.

While Chile’s gains aren’t nearly as impressive as Brazil’s Ibovespa or Peru’s General Index -- 16 percent in dollar terms versus more than 42 percent -- it weathered last year’s global emerging-market rout better. Some foreign investors eager to play the political turmoil but who want less risk than in Argentina or Brazil and more liquidity than in Peru may look to Chile as an attractive alternative, said Humberto Munoz, a fund manager at MBI Inversiones.

"It makes sense that more investors are trying to expose themselves to assets that will benefit from a scenario of more growth and that have been clobbered in the recent past," Munoz said by phone from Santiago. "People are asking themselves, ‘How can I get regional exposure?’ And Chilean retailers like Cencosud are an obvious answer."

Cencosud SA is Latin America’s third-largest retailer by sales with operations in five countries. Chilean information-technology services company Sonda SA gets 39 percent of its revenue from Brazil, and power holding company Enersis Americas SA has 43 percent of its installed generating capacity in Argentina. Retailer Ripley Corp gets a third of its sales from Peruvian consumers, and peer SACI Falabella has 136 stores and 14 malls in the Andean country.

Citigroup Inc. recommended in a April 12 report that investors buy Falabella, Enersis and power generator Empresa Nacional de Electricidad to profit from an expected rally in Peruvian equities.

Money has been slowly returning to Chilean funds after years of outflows. The iShares MSCI Chile Capped exchange-traded fund has received $117 million in flows in 2016 and hasn’t had outflows since January. If it closes April with net inflows, it will be longest streak since November 2013.

Chile is also the least volatile major market in the region. Thirty-day volatility slid to 10.1 percent. In Brazil, it’s skyrocketed to 35 percent as the nation’s Senate considers whether to move ahead with the impeachment of President Dilma Rousseff. That compares with 33 percent in Peru, which is due to hold its second-round presidential election on June 5, and 39 percent in Argentina, which just returned to international bond markets after a 15-year absence following the election of Mauricio Macri in November.

"Political change in Brazil and also the recent change of government in Argentina are benefiting those stocks," Bradford Jones, a fund manager at Sagil Asset Management Ltd., said in a phone interview. "All of those stocks had been under pressure so now that things are a bit less negative, they’re doing better."

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