Photographer: Ronald Patrick/Bloomberg

JPMorgan Says You're Missing Chile's Rally, But There's Still Time

  • Foreign investors have largely sat out this year’s boom
  • Pinera’s expected election may reverse Bachelet reforms

Chilean stocks are expensive, but there’s still plenty of space for growth, according to JPMorgan.

Foreign investors, largely absent from the country’s rally so far this year, will have to look beyond current market valuations if they want to catch the next wave, Diego Celedon, head of equity research and strategy for the Southern Cone and Andes region at JPMorgan Chase & Co., said.

Diego Celedon

Source: J.P. Morgan

“In the past foreigners were the ones aggressively buying first,” Celedon said in a phone interview from Santiago. “Local investors turned optimistic before this time with the scenario of a possible change in the political cycle. Foreign investors have been buying only timidly because of the valuations.”

Chile’s IPSA benchmark index is up about 16 percent so far this year, the best performance in the region’s major markets after Argentina. Investors are betting that former President Sebastian Pinera will return to the seat in the November election and bring in a more market friendly government, cutting back on reforms implemented by sitting President Michelle Bachelet. The IPSA’s trailing price-to-earnings ratio has jumped to 21 times, while its blended forward 12-month price-to-earnings ratio is trading near 17.3 times, versus an average over the last 10 years of 15.4 times.

For comparison, Mexico’s IPC benchmark is at 17.2 times forward blended PE ratio, versus a 10-year average of 15.8 times. Brazil’s Ibovespa is cheaper, at 11.1 times compared to an average of 11.2 times.

Can the Chilean market run out of steam?

“We’re pretty confident that the market still has room to run and that will come not necessarily from an expansion of multiples, which are already at reasonable levels, but rather from expectations of higher corporate profits. If there’s a change in the political cycle towards a more pro-market government and higher economic growth, that should translate into better profit growth. If analysts start to incorporate the higher growth rates, then the valuation multiples should fall, giving the market some more breathing space.”

“If Chile were to grow at more or less its potential GDP growth rate, or about twice as much the current level, corporate profit growth could jump up to almost 20 percent per year.”

What would bring foreigners back to the local market en masse?

“For that to happen we need to see evidence that a new Pinera government is having an actual effect over company results and data, and that may happen once we have more details of his program. Particularly if some of the announcements he has made about infrastructure are feasible or not, and in simplifying some of Bachelet’s reforms, such as tax and labor.”

Which sectors may benefit the most in this scenario?

“Ever since we turned overweight on Chilean stocks last year, we’ve recommended looking for sectors that have the highest exposure to the local domestic cycle. Our favorite sector because of this is banks as the two biggest ones, Banco de Chile and Banco Santander Chile, are 100 percent focused on the local market. If the economy starts to grow, then inflation should pick up and that should be good for the banks as they have a large exposure of their assets to inflation-indexed instruments. Among banks we recommend Banco de Chile.”

“We like utilities for the same reason. We recommend Enel Chile as it’s exposed to the local market and has a cheap valuation.”

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