Chile Stocks Face Day of Reckoning as Pinera Election Looms

(Bloomberg) -- Chilean stocks have risen to record highs on anticipation that former President Sebastian Pinera will return to power and usher in a golden period of growth and prosperity. He has his work cut out for him.

The benchmark IPSA stock index has gained as much as 20 percent since Pinera announced his candidacy for the Nov. 19 election, driven by local blue chips such as lithium producer Soc. Quimica y Minera de Chile SA and pulp producers Empresas CMPC SA and Empresas Copec SA. However, the profit growth to justify the market’s lofty valuations still isn’t showing. In fact, the average earnings of the 19 companies in the index to report so far declined 14 percent in the first nine months.

The only way to support current market valuations is with reforms that could boost potential GDP growth back to levels close to 4-4.5 percent and drive a positive earnings cycle for companies, JPMorgan Chase & Co. said in a report dated Nov. 13.

That is a tall order. Investment has fallen for the past four years, the longest such period since at least 1986, crimping potential economic growth and earnings. Over the same period, wages have risen and the government has increased the corporate tax rate. Pinera’s suggestion to pare that tax increase by two percentage points to 25 percent is unlikely to have an immediate and sizable impact on corporate earnings.

Whether profits will grow fast enough "is a big question mark," said Nicolas Celedon, managing director at financial services firm Fynsa in Santiago. “Any effect from Pinera’s economic measures will most likely be felt in 2019 and not in 2018.”

In the meantime, an improved foreign scenario, including higher copper prices, could help buttress economic growth and the market, Celedon said.

Second Thoughts

Investors may be getting cold feet already. Since hitting a high on Oct. 30, the IPSA index has tumbled 4.5 percent, led by shipper Cia. Sud Americana de Vapores SA and holding company Soc. de Inversiones Oro Blanco SA.

Last month, local pension funds sold a net $197 million of local stocks, the most in almost seven years and after six straight months of net buys, according to data from the local pensions regulator.

For now, JPMorgan is keeping a neutral recommendation on the country’s stocks, citing valuations. On a forward price-to-earnings ratio, Chilean companies are trading more than two standard deviations above historical averages and at some of the highest levels seen in the last 15 years. Typically, Chilean stocks have underperformed the rest of Latin America in the six months following those kinds of valuations, the JPMorgan report said.

Moreover, Chilean stocks are up against some pretty stiff competition in Latin America this year.

Within the next 12 months, earnings per share among companies that make up the IPSA index will grow 31 percent, according to data compiled by Bloomberg. That figure looks pretty good until compared with the neighbors: Brazil’s Ibovespa index companies should see EPS up 61 percent, while Argentina’s Merval index companies are expected to see a boost of 151 percent.

SQM Effect

Despite the valuations and the competition from abroad, some banks remain optimistic on Chile.

Morgan Stanley said in October that the market has room to rise as most of this year’s outperformance can be explained by the rally in commodity stocks. In particular, SQM has jumped 107 percent in 12 months as global investors seek exposure to the boom in electric vehicle production.

Whatever happens to stocks under Pinera, the alternative of any other candidate winning the election is worse, according to many analysts.

Juan Andres Camus, chairman of the Santiago exchange came under fire recently for saying that a Pinera loss would bring a "collapse."

By contrast, analysts are more sanguine about the prospects under Pinera.

"There is a probability that we will see a correction in the market some time after the election," Fynsa’s Celedon said.

To contact the reporter on this story: Eduardo Thomson in Santiago at ethomson1@bloomberg.net.

To contact the editors responsible for this story: Arie Shapira at ashapira3@bloomberg.net, Philip Sanders, Christiana Sciaudone

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