Fynsa
The geopolitical landscape remains fluid, and certain risks of a more prolonged disruption to energy supplies persist. However, our base case continues to assume further de-escalation of the conflict in the Middle East in the coming weeks and that the balance of risks will ultimately tip in favor of the market.
It is worth remembering that geopolitical conflicts, while posing downside risks and high volatility, especially when they end up causing supply shocks in energy markets, they also tend to create opportunities for those willing to look beyond the immediate news cycle. Our main thesis remains that any further escalation is unlikely to persist indefinitely, and that the declines triggered by geopolitical shocks should, ultimately, turn into buying opportunities.
When analyzing all previous instances in which the price of oil rose by at least 50–60% over a short period of time, stocks posted, on average, a gain of +1% during those periods, and the 6- and 12-month stock returns were +7% and +14%, respectively, for the S&P 500, with a 73% success rate over 12 months.
Another question that keeps coming up these days is whether the markets will be able to return to the trading pattern that prevailed before the conflict, characterized by the outperformance of international and emerging market stocks relative to developed markets. The evidence from the recovery over the past few weeks suggests that yes, and the pre-conflict macroeconomic environment was favorable, both from the perspective of growth and inflation, as well as from a corporate standpoint, and we do not believe this has changed substantially.
Although non-U.S. markets experienced steeper declines than the U.S. market during the March sell-off—due to the strength of the dollar and the fact that many emerging economies, Europe, and Japan are net energy importers— during the April recovery, we have returned to a pattern of relatively better performance outside the U.S., as geopolitical tensions ease.
Notably, local stocks have rebounded; Chile was one of the hardest-hit markets in March, but it is also one of the markets that has shown the strongest recovery in April (+11% in USD).
On the corporate front, even during the month of March, earnings estimates in the major regions continued to be revised upward, with the exception of China, and in April, the pace of upward revisions to corporate earnings has accelerated again, particularly in EM and LATAM.
Finally, at the local level, we believe there are still good opportunities for the rest of the year, both in equities and in index-based strategies for fixed income, as we discussed on the 14th and the 28th March.
A de-escalation of the conflict in the Middle East and the implementation of President Kast’s economic agenda could reignite expectations. In particular, domestic stocks remain attractive in terms of valuation. It is true that we remain exposed to higher oil prices, but we also continue to count on higher copper prices and other export prices. Our strongest sectoral convictions remain in banks (deregulation and higher inflation) and commodities (lithium), given the projected increase in the deficit for the latter, the recovery of other segments such as fertilizers, and because we believe there will be lessons to be learned—just as during the pandemic—regarding the exposure of certain supply chains, in this case to the Middle East. So, why, after all this, shouldn’t we see greater demand for electromobility or energy storage? The latter should also support higher copper prices in the long term and improved terms of trade.
