Morgan Stanley Goes All In on Chile Stocks as Macro Risks Wane

Morgan Stanley has turned bullish on Chilean equities on the grounds that macroeconomic risks are subsiding with moderation of planned tax and pension changes.

(Bloomberg) — Morgan Stanley has turned bullish on Chilean equities on the grounds that macroeconomic risks are subsiding with moderation of planned tax and pension changes. 

In a note to clients Tuesday, analysts gave local stocks a double upgrade to overweight, citing lower interest rates, a shallower recession and decreasing political risks. They raised the year-end target for the equity benchmark to 6,100 points versus the 5,357 last close.

“In short, Chile is not out of the woods, but we think those macro risks are receding both in terms of their magnitude and likelihood,” analysts including Lucas Almeida and Juan Ayala wrote. 

Chile’s status as a Latin American safe haven came under fire after a 2019 social uprising led to the drafting of a new constitution and the election of the country’s most left-wing government in 50 years. 

But efforts to overhaul the tax, pension and health systems and do more to redistribute wealth will be less radical than initially assumed, according to Morgan Stanley’s analysis. The pension bill represents more of a long-term fiscal risk given it’s unlikely to materialize before 2024, the analysts wrote. 

Meanwhile, fiscal metrics are looking better than consensus estimates while a cyclical downturn is set to be softer than anticipated. Analysts rotated out of defensive plays such as Enel Chile SA and CAP SA and into domestic cyclical names such as Parque Arauco SA, Falabella SA and Santander Chile. 

Morgan Stanely maintained a neutral view on sovereign credit, but said opportunities are likely to arise in the near term. A risk of higher government expenditure should keep credit trading with a discount. But the tax reform, a more moderate constitution and a lower debt trajectory should help the credit trade closer to A-rated peers over the next year, they said.

For the peso, the analysts see improvements, but warn of stretched technicals as a major headwind in the second quarter when supportive programs from the Treasury and the central bank start to unwind.

As a more optimistic view takes hold, local equities offer the best risk-reward profile, above other asset classes, the analysts wrote. “Risks are receding and should pave the way for more stable times ahead.”

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