A Safe Bet on Water Turns Into Biggest Loser in Emerging Markets

In the volatile world of emerging-market investing, a highly profitable, regulated water utility from a traditional haven nation should be as safe as it gets. Tell that to the shareholders of Chile’s Aguas Andinas SA.

Shares in the Santiago utility have slumped 30% in just two weeks, the steepest decline among 2,248 developing-market stocks in an S&P index.

It’s the latest chapter in a story that started almost two years ago when social unrest exploded in Chile. But the sell-off spiraled this month when the ruling right-wing coalition was trounced in an election for a constituent convention that will write up a new constitution. That left the company firmly in the cross-hairs of a push to use the new charter to return essential services to the public domain -- including water.

“Clearly there is significant uncertainty ahead with respect to how the regulation of water in Chile will be reformulated,” Credicorp Capital analyst Andrew McCarthy wrote Thursday.

Regulatory uncertainty is kryptonite for a stock whose appeal is steady margins and dividends based on regulated returns. Several members of the new assembly are focused on water reform such as raising service quality requirements and restricting the right to cut off services. Some even want to challenge private concessions at a time when drought and climate change fan resource nationalism.

A Safe Bet on Water Turns Into Biggest Loser in Emerging Markets

In the two decades prior to the outbreak of street protests in October 2019, Aguas Andinas shares had risen more than 200%, in line with other water utilities globally.

Sold by the state in 1999 to France’s Suez and the Agbar Group, the utility made major investments and boasted coverage that’s similar to a developed country. Yet, it now finds itself at the center of a backlash against neo-liberal policies dating from the military dictatorship of Augusto Pinochet that ended in 1990.

The stock has plunged more than 60% since the 2019 protests, by far the worst performance among global water peers, with half that loss coming in the past two weeks.

‘Under Pressure’

In a response to questions, Aguas Andinas said it’s essential to prioritize human consumption and access to reliable water and sanitation services, which is why it continues to strengthen the infrastructure and water security of Santiago.

“It is because there is confidence that the necessary framework will be maintained that Chile is able to face the great threat posed by climate change and its profound consequences,” the Santiago-based company wrote.

While the cost of possible changes in rules governing water rights could be passed on to clients, Aguas Andinas may face a reduction to its minimum guaranteed return on assets from 7% now to as low as 5%, according to Jorge Carrasco, an analyst at BCI Corredor de Bolsa.

“We estimate the share price will remain under pressure until the tone of the new constitution is outlined,” he said.

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