Chile
Go long LATAM ex. Brazil banks / short global bank stocks. Brazilian bank equities will underperform due to poor and worsening macro fundamentals.
Following this weekend's election, we reiterate an overweight stance across Chilean risk assets relative to EM benchmarks and advise buying local currency government bonds (currency unhedged).
Chilean equities are undergoing a structural re-rating. A political swing back to a pro-business administration, a benign macro backdrop, and a resilient exchange rate will drive Chilean markets’ outperformance versus EM peers.
In this chartbook, we look at the balance of payments across DM and EM countries. The US does not fare well, but neither do a few other countries.
In absolute terms, Chilean markets and the currency will fall given a strengthening trend in the US dollar and weak global trade. However, Chile’s economy can withstand the global trade slump relatively well due to substantial monetary easing at home, which will help Chilean markets outperform EM peers. Moreover, a favorable and improving political backdrop and attractive valuations will benefit Chilean equities and the peso versus their EM counterparts.
Oil markets will not be impacted by Venezuela in the near term, but by shocks from the Middle East. Maduro’s ability to stay in power in the short-term removes an avenue of oil supply relief. The same avenue is cut off if Trump is reelected. Geopolitical shocks in Venezuela could present tactical buying opportunities for Chile, Peru, and Colombia.
Non-trivial macro divergences have emerged between mainstream LATAM economies. This report compares and ranks Brazil, Mexico, Colombia, Chile, and Peru based on their business cycle outlook, macro policy stance, external accounts, and structural fundamentals. All in all, LATAM risk assets will fall in absolute terms given a strengthening US dollar and a global risk-off move in the coming months. Within LATAM, we favor Mexico, Chile and Peru, are neutral on Brazil, and bearish on Colombia.
We dig into the USD-denominated Emerging Market Sovereign Index to see which credit tiers and countries offer value relative to US Credit.