Local Macro Scenario

• By 2023, GDP is projected to contract by -1%.
• Base scenario inflation at year-end 2023: 5.0% YoY.
• TPM 2023 at 9.75%. Rate cuts starting in September.
• Local uncertainty moderates and approaches pre-2019 levels. However, 2023 will continue to be marked by ongoing reform processes.
• From the point of view of economic and financial expectations, since the rejection of the previous constitutional text and the achievement of a new agreement with "enough guarantees", the markets have been incorporating a scenario of less uncertainty, also due to the progress of the adjustment process of the economy and the halt of new withdrawals of pension funds.
• In this sense, the newly elected Constitutional Council "is likely to produce a draft Constitution that will command greater consensus". This, given that the process not only has well-defined boundaries, which generally preserve the current macro policy framework, but also includes important checks and balances with the oversight of the expert and technical admissibility committees.

Local Fixed Income 

Maintain positioning in the short end of the curve. Neutrality in terms of UF exposure.

• Maintain positioning in the short part of the curve: negative slope, higher yield in short terms.
• Neutrality in terms of UF exposure, range 70-80%.
• Inflation projected by the market falls below 4% for the next 12 months. Forwards discount inflation of 4.83% /3.41% for the years 2023/2024, respectively.
• According to Fynsa's Economics area, inflationary biases would be neutralized at these levels.
• The current scenario suggests an allocation that favors nominal rates of less than 1 year and real rates in longer durations.
• Overweight corporate issuers with high risk ratings (AAA; AA)
• Improved dynamics of institutional flows.
• Our investment fund Fynsa deuda Chile offers an attractive risk/return ratio, with a YTM of UF+5.3%, with only 1.7 years of duration. Flexible exposure to the UF, today close to 71%. Exposure close to 85% in bank bonds, DAP and treasury, obtaining a favorable liquidity position. Conservative portfolio in terms of credit risk, with an average rating of AA+.

Local Equities 

IPSA offers an attractive risk/return ratio

• One of the few global markets with the possibility of expanding multiples. High dividend yield. CLP appreciation potential in line with DXY depreciation and rising commodity prices.
• IPSA offers a substantial discount relative to its peers and its own history.
• Attractive dividend yield 8.5%.
• Despite the good performance of recent years, the local stock market continues to trade at very discounted valuations. Measured in dollars, the IPSA is -33% with respect to its historical high (Dec 2010). In the same period, MSCI ACWI returned +173%.
• Our projections call for the IPSA to rise to around 6,500 points in 12 months, which is equivalent to an increase of ~16% from current levels.
• Low representation of the asset class in the portfolios of local and international investors.
• Local political scenario has become more neutral (positive). The outcome of the constituent elections a few weeks ago indicates a further reduction in risk, which has been one of the main factors holding back investors from allocating higher valuations in local assets.
• Sectors to overweight: Commodities (SQM), Consumer (Andina). Retail (Cencosud).
• Our investment fund Fynsa Total Return offers a portfolio with high conviction based on the concentration of its positions and its exposure to sectors, favoring companies with attractive valuations, growth catalysts and attractive dividends. The fund has consistently outperformed the IPSA and has positioned itself competitively against a demanding sample of equity funds, ranking in the top quartile since its inception.

Exchange rate 

The fall of the exchange rate is already starting to overcome the fundamentals again. 

• Fundamentals at the margin have improved for the dollar. Much of the dollar's decline since 4Q22 has to do with the idea of a more dovish Fed than the rest, and a weaker US economy than the rest. Well, that is not so evident at least recently. Economic data have been worse than expected in Europe than in the US, which can also be explained by a certain loss of strength in the process of reopening the Chinese economy.
• Of the more intrinsic variables of the peso, at the local level we have a fall in the risk premium measured by CDS, a lower current account deficit, although a slight deterioration of terms of trade in the recent past, given the greater fall of copper which today is trading closer to US$3.7 per pound, far from the US$4.1 of just a few weeks ago. Foreign investors have been reducing their bets against the peso, which stand at ~US$4500 MM.
• Our model, which contains global dollar, terms of trade, rate differentials, risk premium (CDS) and risk appetite (equity), is giving us an equilibrium CT at $836 vs. $786 (as of May 15), that's $50 of misalignment which is partly low in historical terms.

For more details, you can access the full report here..

Humberto Mora

Assistant Investment Manager Finance and Business Finance and Business Brokerage Firm