Fynsa
As a reader of our newsletter, you already know that our base scenario for the IPSA is 5,200 points, which already recognizes the higher implied risk of investing in CHILE.
We have incorporated a bearish scenario that assumes a 50 bp increase in the cost of capital for companies (which is what we have seen reflected after the third withdrawal of pension funds). Thus, the IPSA is currently trading close to that risk scenario (4,600 points).
Local equities face this weekend's election already having taken a significant hit, trading at 12x future earnings (the lowest valuation level since October 2019).
This punishment is not only local, but also regional. Although we have seen a strong recovery in the IPSA in recent months, it still looks attractive compared to Latin America and even more so compared to emerging markets, from a PU and stock market perspective.
We believe that such a large discount relative to the region, as we had on October 18, 2019, or at the worst point of the pandemic, would no longer be justified, given that we will grow more, the pandemic has been better managed, and we have a successful vaccination process. Today, the IPSA is trading at a discount of almost 40% compared to Latam in terms of B/L.
In addition, today we have a substantial improvement in terms of trade (the best in the last 20 years).
That being the case, we believe that the risk is asymmetrical from current levels, with much of the bad news already priced in.
Raising awareness of greater political risk.
However, with regard to this weekend's elections, we wanted to stress our models even further and incorporate a more rigorous test for the IPSA.
A first approximation is to assume a growing deterioration in risk perception, and therefore higher risk premiums, associated with political and institutional deterioration and a larger fiscal deficit.
Today, Chile has an A rating. We initially assume a further deterioration in the credit profile in the medium term, but without losing the investment grade rating, which in practice would bring us closer to Colombia, which currently has a BBB- rating; that is a CDS delta or spread of +90bp, to which we could add a 10-year Treasury yield closer to 2.0%.
With that in mind and raising awareness of the important variables:
In this case, the bearish scenario would be closer to 4,300 points (-5.0% from current levels). We believe that this is what we risk in the face of a particularly complex second half of the year, amid the constitutional process and a presidential election. (see acid analysis table)
Of course, compensatory effects can be incorporated, given the greater external dynamism and higher copper prices, which could lead to higher ROE levels (in previous cycles, we had ROEs closer to 15%).
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