No More Border Wall: Ecuador to Mend Relations With Peru

Suspension of the Ecuador-Peru border wall

On July 14th, Ecuador’s Foreign Minister Maria Fernanda Espinosa announced that the country had decided to halt the construction of the border wall with Peru (EPU). The wall was built as a flood precaution by Ecuador. It has been the center of controversy for some time now, straining diplomatic relations between the two countries. The issue had gained prominence following US President Donald Trump’s pledge to build a wall between the US (SPY) (IWM) and Mexico (EEW).

Peru, which believes that the wall infringed on a 1998 deal which prohibits construction within 10 meters of the border, recently recalled its ambassador from the country to express its rage over the decision. Subsequently, the foreign ministry of Ecuador announced the suspension of the construction of the mile-long, 13-foot high wall between the two Latin American (ILF) (GML) countries.

Ecuador mending relations with Peru

The suspension should bode well for Andean (AND) countries. The wall would have led to about 5,000 job losses on each side of the wall, primarily in the local fish trade. Currently, fishermen cart their fresh catches over the canal which outlines the border across bamboo footbridges. With the wall in place, workers would have had to take a lengthy detour to unload their catches in Peru probably putting an end to the trade.

Moreover, Peru counts among the top 3 export destinations of Ecuador. Close to $1 billion worth of goods are exported from Ecuador to Peru, accounting for 5.1% of its exports (see chart above). The wall would have certainly impacted cross-border trade volumes.

Now, while on one hand, Ecuador has taken a step to mend its diplomatic relations with Peru, on the other hand, it stands a chance to strain its relations with the OPEC (Organization of the Petroleum Exporting Countries). The next part of this explains how.

After A Good Run In YTD 2017, Is A Peak For Chile Stocks Near?

Chile is the second best performing stock market in the Latin America region behind Mexico in 2017. The MSCI Chile Index has risen 14% for the year, trailing Mexico’s 19.4% return.

The iShares MSCI Chile Capped ETF (ECH) – the sole ETF traded on US exchanges which invests exclusively in Chilean equities – has risen 16% for the year. Meanwhile, Chilean equities form 35% of the portfolio of the Global X FTSE Andean 40 ETF (AND).

The ECH has been led upwards this year by the utilities, materials, and financials sectors, in that order.

All holdings from the utilities sector have contributed positively to the fund, led by Enel Américas S.A. (ENIA) and supported by Enel Chile S.A. (ENIC) and Enel Generación Chile S.A. (EOCC).

All holdings from the materials sector have also boosted the funds performance. The sector has been led by Sociedad Química y Minera de Chile S.A. (SQM).

Meanwhile, financials have been powered by Banco Santander-Chile (BSAC).

View on Chile stocks

The Chile-listed It Now IPSA ETF has attracted inflows worth $2.5 million in YTD 2017 according to Bloomberg data. Conversely, US investors have not taken much interest in US-listed ECH, with the fund witnessing net outflows to the tune of $864,500 so far this year.

One of the reasons for the lack of interest is that the $447.5 million ECH is not quite cheap at a price-to-earnings ratio of 17.67. There are less expensive options available in Latin America such as Colombia.

Also, several brokerages have a negative view on Chilean equities.

According to Bloomberg, HSBC is keeping Chile stocks at ‘underweight’ and has liquidated LATAM Airlines Group S.A. (LFL) and reduced exposure to SQM – the now sole holding from Chile – in its model portfolio.

Meanwhile, while Itau has eliminated Chilean equities from its portfolio as it considers the market to be expensive. Citigroup has reduced its exposure to the country to ‘market weight’ citing similar reasons.

On the other hand, Morgan Stanley remains overweight on Chilean stocks as they view them to be cheap among the broader spectrum of emerging markets. Further, they believe that the election in November may lead to improved macro policy, and the political outlook is not completely priced-in yet.

Though a sell-off, especially via an ETF, may not be immediately warranted, adding exposure at this point should be done selectively.

Why Fighting Chronic Addiction to Copper May Not Be Enough To Tackle Chile’s Debt

Diversification on Chile’s productivity agenda

President Michelle Bachelet is convinced that “in 10 years and hopefully before, with all the things we are doing with the productivity agenda, with growth, Chile is going to be a far more diversified economy.” This may seem to be good news for investors in this Latin-American (ILF) country. For instance those holding assets in the iShares MSCI Chile Capped ETF (ECH), the Global X FTSE Andean 40 ETF (AND), or the Guggenheim Frontier Markets ETF (FRN), which have exposures of around 94%, 49%, and 41%, respectively, to Chile’s capital markets. However, there is a flipside to this coin that investors in ECH and/or Latin America should take into account; the debt situation in Chile.

[stockdio-historical-chart stockExchange=”NYSENasdaq” culture=”English-US” width=”100%” height=”350px” symbol=”ECH” displayPrices=”Lines” performance=”false” from=”2014-07-01″ to=”2017-01-29″ allowPeriodChange=”true”]

The country has about $162 billion in external debt, of which over 90% is US-dollar denominated. As the US dollar (UUP) appreciates, Chile could find it increasingly difficult to adequately service this debt.

Copper prices are still very low

Chile is the world’s largest copper producer, accounting for over a third of global copper output. Copper accounts for about 55% of all Chilean exports and generates 20% of the government’s revenues. Chile had once flourished under the copper boom between 2009-11, when the price of copper rose from $3330 per metric ton in Feb 2009 to $9500 per metric ton in March 2011. However, over the last five years, copper prices have slid by over 25%.The economy’s GDP (gross domestic product) growth rate has fallen from almost 10% in 2011 to 1.6% as of 3Q16.

Moreover, industrial boom in China (FXI) has been one of the major contributors to growth in Chile. China’s rapid industrialization made it the top consumer of copper, thereby also Chile’s top export destination. With industrial growth in China showing signs of tapering and China’s shift in growth model from an export-driven economy to a consumption-led country, we may continue to see copper demand dwindling down.