The prospect of the most aggressive interest-rate cuts in the world has helped send Chilean stocks to record highs in a sign of what may be in store for other markets as their central banks turn dovish.
(Bloomberg) — The prospect of the most aggressive interest-rate cuts in the world has helped send Chilean stocks to record highs in a sign of what may be in store for other markets as their central banks turn dovish.
Chile’s equity index is the second-best performer among global benchmarks tracked by Bloomberg in the eight trading days since a surprise drop in consumer prices. That’s taken the Ipsa’s advance in the past three months to 13%, beating indexes in Mexico and Brazil, with analysts forecasting further gains based on still low valuations.
“Investment flows from both institutional, foreign and retail investors have been increasing, positioning remains light, and both the macro environment and corporate earnings should improve by 2024,” Humberto Mora, senior investment strategist at Santiago-based brokerage Fynsa, said in a note sent Monday.
The swaps market has Chilean rates coming down more than any other this quarter, with much of Europe and the US still in tightening mode. That would cheapen credit at a time of easing political risk. Even after the recent gains, Chile remains historically cheap at about 10 times estimated earnings and well below other emerging markets.
Retail stocks like Plaza SA, SMU SA and Falabella SA have been leading gains in the past month on prospects of a rebound in consumer demand.
Valuations got so low after an outbreak of social unrest in 2019 led to efforts to draft a new constitution and ushered in a left-leaning government promising sweeping tax reform. That put Chile’s credentials as an investor-friendly jurisdiction to the test.
Tensions eased after an initial constitutional process gave way to a more conservative format, the government modified tax increases for the mining industry and efforts to drain more money from the pension system were blocked.
“The large macroeconomic imbalances that built up during Chile’s post-pandemic recovery have eased substantially, which is likely to prompt the central bank to deliver more rate cuts than almost any other EM central bank over the next couple of years,” Capital Economics’ Kimberley Sperrfechter wrote Monday.
“We expect this, alongside looser fiscal policy and high copper prices, to pave the way for a stronger recovery than most expect,” she said.
–With assistance from Sebastian Boyd and Matthew Malinowski.
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