The Chilean equity markets were under pressure for most of 2013, thanks to outflow of capital from emerging markets over taper concern and declining copper prices.
Fluctuations in the price of copper impact this Latin American economy since it is the largest producer of the metal in the world. Also, a subdued Chinese growth rate, one of Chile’s largest trading partners, kept the markets of Chile under pressure last year (Read: China ETFs Tumble to Start 2014).
However, things might turn around for Chile, at least for the next few months, as its central bank aims to change its current stance on monetary policy.
The Current Picture
The central bank of Chile kept its benchmark interest rates unchanged at 4.5% in its January policy. The bank has now kept the interest rate steady for the second consecutive month.
An unexpected jump in inflation to 3% in December from 1.5% in October prompted the bank to keep interest rates unchanged in its December and January policy. The depreciation of the peso against the greenback is considered as the prime reason for the spike in inflation.
The bank had made two consecutive interest rate cuts in October and November by 25 basis points each. However, President Rodrigo Vergara signaled that lackluster figures for gross domestic product (GDP) might prompt the bank to loosen its monetary policy in its upcoming policy meeting (Read: Best ETF Strategies for 2014).
Factors Paving the Way for Rate Cuts
The economy’s GDP, as measured by its Imacec index, rose modestly at 2.8% year over year in both November and December. The expansion rate was the slowest since July 2011.
Moreover, uninspiring manufacturing output data for the month of November (down 1.1% year over year) is also a matter of concern. It marked the fourth successive monthly decline in manufacturing production, largely blamed on lower production of iron and steel products.
Also, Rodrigo Vergara, the President of Chile’s central bank, believes that a less than full capacity growth in the economy will keep inflation below its target level of 3%. A rise in inflation in the preceding two months is believed to be temporary, and nothing to base policy decisions on.
Thus, lower GDP and manufacturing data along with expectations of falling inflation might lead its central bank to consider cutting rates in its next policy meeting. This cut aimed to boost the Chilean economy is expected to cheer the morale of equity investors. A drop will enable corporates to borrow at a lower cost, thereby boosting their profits.
As such, investors willing to participate in the rally can easily do so via the ETF route and might consider adding iShares MSCI Chile Capped ETF (ECH) which we have highlighted in further detail below:.
ECH in Focus
The fund follows the MSCI Chile IMI 25/50 Index. ECH holds 41 securities in total and charges investors 61 basis points a year in fees (See all Latin American ETFs here).
The ETF currently manages an asset base of $352.4 million. With almost 60% allocation towards its top 10 holdings, the fund is exposed to higher concentration risk. S.A.C.I. Falabella (8.66%), Empresas Copec (8.55%) and Enersis Sa (8.43%) are the top three holdings.
From a sector perspective, utilities (24.69%), financials (17.3%) and consumer staples (12.42%) account for nearly 54% of the total fund assets.
The ETF had slumped around 25% in 2013 due to various reasons including weak copper prices, a stronger dollar and weaker demand from emerging markets (See Latin America ETFs Beyond Brazil).
The fund has a dividend yield of 1.48%.
It might be a good idea for investors to get into ECH, which is trading almost 30% below its January 2013 level. A cut in interest rates is expected to give some boost to ECH. Moreover, improving economic conditions in the U.S., Europe and China might enhance the global demand for commodities, providing relief to commodity focused ETFs such as this Chilean fund.
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