Should You Invest in Chile?

Includes: BCH, CH, ECH, SQM
by: Econ Grapher

The Banco Central de Chile just increased its monetary policy interest rate by 50 basis points to 5.00%. So what is going on in the Chilean economy? This report provides a brief insight into the monetary policy decision, the state of Chile's economy, and how investors can gain exposure to this market.

First up, looking at the statement from the Bank, it seems pretty clear that the Bank is firmly in tightening mode:

The Board estimates that additional increases in the monetary policy rate will be necessary, the timing and the magnitude depending on the unfolding of domestic and external macroeconomic conditions. Accordingly, it will continue to use its policies with flexibility so that projected inflation stands at 3% over the policy horizon.

So what is the inflation situation in Chile? The Chilean economy has had the dual shock of the global financial crisis and a massive earthquake in 2010. Aside from those however, the Chilean economy is recording relatively robust growth, which, paired with rising commodity prices, makes for upside inflation risk. Chile reported GDP growth of 5.9% in the December quarter last year, while inflation was 2.9% in the March quarter of this year, up from 2.6% in the previous quarter.

On inflation and the domestic economy the Bank said in its press release:

Domestically, output, demand and labor market figures reflect the dynamism of the economy. Annual CPI inflation indicators have hovered around 3%, while measures of core inflation remain bounded. Private inflation expectations show a reversal, but remain above the target.

Overall Chile makes for an interesting emerging market economy. The IMF is forecasting real GDP growth of 5.9% for Chile this year, slowing to 4.3% by 2016. While inflation is forecast at 3.6% and 3% respectively. As can be seen in the GDP chart, Chile has generally enjoyed relatively strong (typical emerging market) GDP growth over the years, but with some notable dips during major external shocks. While it has a relatively broad based economy, its largest export is copper, so if you invest there it would probably pay to monitor the copper price outlook. Overall though, Chile is one of the wealthier countries in the LatAm region; being the first South American country to join the OECD. With a relatively strong outlook, it should at least make the short-list of globally focused investors.

In terms of gaining investment exposure to the Chilean economy, there are a range of Chilean companies with listings on the American exchanges, e.g. Banco de Chile (NYSE:BCH), The Chemical and Mining Co of Chile (NYSE:SQM), and others. In terms of ETFs (exchange traded funds), there's the Aberdeen Chile Fund (NYSEMKT:CH), which is an actively managed ETF, and there's also a passive option with the iShares MSCI Chile Investable Market Index tracker (BATS:ECH). So it depends how active your investment approach is when it comes to stock-picking/implementation, if you're just focused on macro calls and broader asset allocation decisions then the passive ETF could do the trick.

Banco Central de Chile
OECD Stats

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.