The local market continues to operate in an environment of great uncertainty; while the primary election results have alleviated some negative risks, legislative initiatives (particularly a potential fourth withdrawal of funds from the AFPs) and developments within the constitutional convention will continue to take center stage. 

However, expectations regarding a fourth withdrawal, in particular, have been fading, and the chances of it being rejected by the Senate are increasing.

We believe that Chilean stocks offer a good risk-reward ratio ahead of the presidential election (three months from now).

Looking ahead to the rest of 2021 and taking into account the new information available, we continue to believe that there are reasons to be a little more optimistic (or, if you prefer, “less pessimistic”).

1) Although the level of macro-political uncertainty has decreased somewhat, it remains high, and the upcoming November presidential elections and the ongoing Constitutional Convention process suggest that volatility in local markets could well persist; however, we believe there is some room to focus more on economic recovery, the reopening of businesses, and improvements in corporate earnings. Thus, we could see a couple of slightly calmer months (leading up to the presidential elections) that would allow the IPSA to reverse some of the sharp decline already priced into valuations, as political headwinds will ease somewhat and the market will be able to move more in line with fundamentals.

2) The external environment will remain favorable, with copper prices expected to continue rising, increased global liquidity, and a highly expansionary fiscal policy focused on raw materials—all of which are key indicators that could generate higher capital gains on the local stock market.

3) In terms of public health, with more than two-thirds of the population fully vaccinated and the progress of the “Step-by-Step” plan, the economic reopening has been gaining momentum. So far, the country has been in a privileged position regarding vaccine availability thanks to the government’s efforts, which have served as an example for other countries in the region and even for several developed nations. This will naturally help accelerate the recovery of our economy.

4) All of this leads us to believe that, on the one hand, we could see a better-than-expected recovery in corporate earnings and, on the other hand, there could be room for some expansion in P/E ratios.

5) In fact, corporate earnings far exceeded expectations in Q2 2021.

In terms of strategy, we favor stocks that we believe are undervalued (value), of high quality (solid financial position), and have growth potential. In terms of sectors, we are focusing on commodities, banking, retail, and real estate.

•   We expect the favorable trends in the commodities sector to continue going forward, as the combined fiscal and monetary stimulus—which far exceeds the measures taken during the financial crisis—coupled with greater stability in the Chinese economy, are tailwinds for demand in the sector. This, combined with some Covid-19-related supply shocks, should support further price recoveries.

•   We believe that sectors such as retail, shopping, and banking would benefit the most from fiscal stimulus through government bonds and ample consumer liquidity, coupled with the economic reopening driven by progress in the vaccination process.

For more details, please see the attached report: Local Equity Strategy