• In a complex start to the year for risk assets, the IPSA managed to stand out from global markets affected by expectations of rate hikes by the Fed and the recent global geopolitical conflict. The IPSA's higher performance is mainly explained by the strength of commodities and its "more value" composition (see attached table), a characteristic shared by the rest of the region's stock markets, which, added to attractive rate differentials, has favored greater investment flows to the region.

Growth: Consumer Discretionary, Information Technology, Communication Services, Health Care (longer duration and therefore more sensitive to higher interest rates)

 * Value: Energy , Materials, Financials, Industrials (more indexed to the "real economy," sensitive to higher inflation, "short on duration" and therefore less sensitive to higher interest rates)

• In fact, foreign investors have been the major buyers of local shares in recent months. The creation of shares in the ECH (the ETF that tracks the MSCI Chile) is at an all-time high.

• Thus, while global equities fell 5.2% in the first quarter, the IPSA performed +24.5% measured in dollars, very close to the performance of the rest of the region.
• Sectors related to local activity and higher inflation dynamics stand out, such as banks (+24% ytd) and commodities (+44% ytd), given the positive outlook for most local underlying assets (iron, lithium, cellulose). Both sectors currently account for almost 60% of the IPSA.

• Despite the IPSA's outstanding performance so far in 2022, in contrast to global equities, we see room for further recovery in a context of valuations that remain attractive in the long term, both in absolute terms and compared to other Latin American markets. Although the domestic scenario will remain complex due to the political and institutional challenges we face in the coming months, the external scenario offers some compensation, given the attractive prices of copper and raw materials in general (iron, cellulose, lithium). 
• Geopolitical escalation has significantly increased the risk of further aggravating the energy and commodity crisis that has developed over the past two years. Potential disruptions to trade in oil, gas, grains, and metals now pose a significant risk to investments and the real economy. Investors should therefore hedge this risk by increasing allocations to commodities, energy, and materials. These allocations would serve as a hedge against inflation and geopolitical risks.
• The "more moderate" tone set by the Central Bank regarding the future trajectory of the monetary policy rate has led to a sharp adjustment in market rates in recent days, which should ease pressure on widely discounted valuations and allow for some expansion of multiples in the short term.

• All in all, in a still conservative scenario, we are slightly adjusting our IPSA projection upward to 5,300 points (+7.5%) and +15% in our most optimistic case (5,650 points). This adjustment is justified in a context of still upward revisions in expected earnings for 2022 (+15% in March alone) and lower interest rate pressures, given the more moderate tone set this week for interest rates by the Central Bank.
• We favor selectivity in stocks that we find undervalued (value), of high quality (solid financial position), and with growth potential. Sector-wise, we are favoring commodities, banks, and consumer goods.

Investment decline 

Our Fynsa Total Return Fund provides exposure to local equities through an active, high-conviction strategy that maximizes alpha generation. For more details, see HERE.

Humberto Mora | Assistant Investment Manager