Investing in Chile: Decoupling - Sort Of...

Chile has been a favorite investment destination for quite a while. I was out for awhile before getting back in late last year (I have disclosed this a few times).

The chart shows the bank stock I bought in green (the name does not matter), the benchmark Chilean index in blue and the S&P 500 in red.

One of the reasons I like Chile is that only 15% of its exports go to the US, so its fate is not that tied to the US. The chart shows there was sympathetic price movement, but the fundamental link between the two is not that strong.

There are several reasons I went with a bank stock, including the fact that while Chile is obviously a commodity-based economy I had enough materials stocks, and this bank in particular has fewer moving parts than a lot of banks - including no tier 3 capital.

One popular way to access Chile is with electric utility companies. This very well could be a way to invest, but Chile is facing an issue with not being able to generate enough power to avoid rolling brown outs. I may have this wrong, but rolling brown outs would seem to be a negative catalyst for a power generator or distributor.

As obvious as that seems to me, I should note that the iShares Chile (ECH) has outperformed my bank stock YTD and it allocates 23% to utilities. Enersis (ENI) is up even more than ECH. For now, the market does not care about this (ie. I am wrong for now), but I think it makes sense to avoid what seems like an obvious issue.

The other important catalyst for Chile that I have written about before is that they have what is essentially a privatized social security program, which creates a constant demand for Chilean equities.

Other than the privatized social security, Chile is not that different from other commodity-based economies. The country is at a different point in its economic cycle, it is a surplus country (not all of them are, however) and there are far fewer moving parts than in the US.

The point is not that you should run out and buy Chile but that the work needed to understand the big picture is not that complicated. This is true of many countries.