Investors Shrug Their Shoulders as Morgan Stanley Tries to Talk Up Chile’s Sovereign Debt

After years of political turmoil, street protests and economic stagnation, Morgan Stanley say it’s time to buy Chilean assets again, including sovereign debt. Other banks and investors are yet to be convinced.

(Bloomberg) — After years of political turmoil, street protests and economic stagnation, Morgan Stanley say it’s time to buy Chilean assets again, including sovereign debt. Other banks and investors are yet to be convinced.

Analysts led by Emma Cerda and Simon Waever wrote Sept. 18 that Chile’s dollar and euro bonds looked attractive versus those of Latin American peers such as Peru, Mexico and Uruguay. It recommended, among other moves, buying Chile’s 2071s or going long Chile’s 2034 bonds in euros while shorting Peru’s 2034s in the same currency.

The analysts cited Chile’s “cheap valuations compared with most investment grade names, its lack of expected issuance in the near term, and a continuous recovery in its macro backdrop.” Political risk had also fallen, they said, with the government forced to scale back plans to raise taxes, while attempts at a radical rewrite of the constitution are dead in the water.

But traders from PGIM and Pictet are more cautious, seeing little room for spread compression right now, while BTG Pactual warns that risks are still lurking in the background. BTG Pactual also cites a near quadrupling of Chile’s dollar debt over the past four years and the prospect of further debt sales to come before the end of the year. Morgan Stanley may be getting ahead of itself, they say.

The price of Chile’s sovereign 2033 dollar bonds has fallen to 78 cents, the lowest since November, from 82 cents in early August, tracking declines in their US counterparts. The yield on Chile’s generic 10-year bond has risen to 5.56% from a low of 4.60% in April.

The Defense

First, the argument in Morgan Stanley’s defense.

Chile’s economy is expected to return to growth next year of about 2%, according to estimates compiled by Bloomberg, after shrinking about 0.2% this year.

What’s more, as the inflation rate tumbles, the central bank is spearheading interest rate cuts across Latin America, with the key rate expected to reach 5% in a year from 11.25% just two months ago.

Business confidence is also improving. The indicator is still in the “pessimistic” zone below 50, but recovered to 43 in August from 36 in December.

At the same time, voters have rejected a radical rewrite of the free-market constitution that dates from the military regime of Augusto Pinochet. A second attempt to change the charter also looks destined to failure, meaning Chile is likely to remain with its current constitution. That is a relief to markets.

And finally, Morgan Stanley has a good track record recently. In July of last year, it recommended El Salvador’s 2027 bonds, which were trading at 26 cents. They are now at 84 cents.

The Prosecution

Some argue that Chilean debt isn’t cheap as much as other investment grade debt is overpriced.

“A lot of investment-grade stuff is very expensive,” said Zulfi Ali, a portfolio manager at PGIM Fixed Income in Newark. “I’m not saying I dislike Chile, but I don’t see a ton of value.”

Guido Chamorro, co-head of emerging-market hard-currency debt at Pictet Asset Management in London, agrees.

“The fundamental country view for us is fairly stable,” Chamorro said by email. “Debt/GDP still looks among the healthiest in Latin America. Simply a bit expensive, so we don’t see much room for spread compression.”

Francisco Mohr, head of fixed income at the asset management division of BTG Pactual in Chile, sees an oversupply of sovereign debt pressuring prices at a time that economic growth estimates are stable, while those for others such as Mexico are being adjusted higher.

Four years ago, Chile had $8 billion in foreign currency debt outstanding and now that is near $31 billion, he said. And it could still issue $3 billion more this year, Mohr added, citing statements from the Finance Ministry.

“I don’t see Chile’s dollar debt yield curve compressing any time soon.”

ECONOMIC CALENDAR:

All events in Santiago local time.

Chile
- Sep. 26, 8:30am: Central Bank traders survey
- Sep. 29, 9am: Aug. unemployment, industrial production, manufacturing, retail sales and copper output
International
- US
  - Sep. 26: 11am: Aug. new home sales
  - Sep. 27: 9:30am: Aug. durable goods orders
  - Sep. 28: 9:30am: 2Q GDP
- China
  - Sep. 29: Sep. manufacturing PMI
- Eurozone
  - Sep. 29: Sep. CPI