Regardless Of Who Wins Chile’s Elections, Codelco Likely Loses

If Chile’s year-long bull market is anything to go by, conservative candidate Sebastian Piñera is likely to become the country’s next president after the December run-offs. But neither Piñera nor his centre-left rival Alejandro Guillier seem too concerned about state-miner Codelco, whose financial well being could have a ripple effect on the global copper market.

Codelco (1006Z:CI) has consistently posted strong quarters since it began implementing austerity measures during the 2015 copper market dip. Last quarter saw a pre-tax profit of $1.6 billion, an overall improvement of more than three times against the loss posted for the same period last year. Nonetheless, it’s a trend that is hardly sustainable given Codelco’s falling ore grades and aging mines.

The state-miner’s average ore grade has fallen roughly 10% since 2013, meaning Codelco has to process 10% more ore in order to produce the same amount of copper it did five years ago. At a time when declining ore grades are prevalent across the industry, the state-miner has to invest in higher yielding mines to remain profitable.

Codelco, which accounts for around 60% of Chile’s exports, would need around $20 billion to keep output flowing and expand its operations according to internal reports. Codelco has proposed revamping operations at its traditional crown jewels, the El Teniente and Radomiro Tomic mines, as well as resuming interest in investments outside Chile in projects as far away as Mongolia. Can they get it done?

Political Priorities For Codelco

Both runoff candidates, conservative Sebastian Pinera and centre-left Alejandro Guillier have widely differing priorities for the state-mining giant. Piñera, who has shown scepticism over Codelco’s management in the past, has recently told the miner it would have to maximize performance of existing assets and draft a “realistic investment plan”.

During his first administration, Piñera turned to the bond market to finance Codelco, raising the miner’s debt 84% at a time when there were already high market prices for copper. The presidential candidate now promises to reduce public spending and lower the country’s deficit. That would leave Codelco high and dry.

In contrast, Senator Guiller has prioritized relations with the company’s unions, much like the outgoing administration of Michelle Bachelet. Labour actions have hit copper miners hard over the past few years, particularly inside Chile. Melbourne-based BHP Billiton (BHP:AU) saw a 43-day strike in its flagship Escondida mine from February to March, cutan estimated $1 billion off its yearly revenue. Codelco’s Chief Executive Nelson Pizarro freely admits the mining industry is “unpleasant” to most Chileans. Nevertheless, while improving union relations could protect the miner’s bottom line, it would do little to add to production.

Guiller’s plans, however, are likely to be heavily influenced by leftist party Frente Amplio and its strong showing in the November elections. Frente Amplio had previously called for the recapitalization of Codelco in order to finance social spending, leaving little room for mining investments.

Surprisingly, both candidates have vowed to unburden the state-miner of its constitutional mandate to fund the military. The Pinochet-era legislation transfers 10% of Codelco’s export sales (roughly $866 million last year) to the Chilean military. The widely unpopular piece of legislation could free up capital for investments. But the laws successful passage will arguably have more to do with the incumbent legislative assembly than the president.

Fractured Landscape

The success of a left-wing Frente Amplio and other non-coalition parties in the legislative elections has muddied the waters for both runoff candidates. Regardless of who wins, they are unlikely to hold a strong mandate and will be forced to balance their centrist appeal and cater to their bases’ extremes.

Chile’s fragmented congress will force the incumbent president to cross party lines in order to pass any significant legislation. This is particularly troubling for Piñera given that both congress and the senate lean towards the left. Passing his proposed tax reforms will be next to impossible without support from the centre-left. For Guiller, this will likely mean his entire agenda will be pulled to the left by Frente Amplio.

In this fragmented legislative environment, a repeal of Codelco’s 10% military burden is highly likely to stall. There is already a broad concern the export tithe will not be cut back regardless of the President’s policy initiative. They point towards the influence the Chilean military continues to wield over all branches of government, irrespective of recent corruption scandals. Mining Professor Gustavo Lagos at the Universidad Catolica is among those that sees doubts that the law will ever get overturned: “I’m not very optimistic (…) we’ve been talking about it for 25 years”.

However, if the military funding mandate were to be repealed, there is no certainty Codelco will keep the 10%. It may very well be distributed to any other policy priority outside the miner’s coffers. So far Piñera has been the only candidate to insinuate he might return the money back to Codelco.

Emerging Risks

It’s a mistake to dismiss Chile’s influence in the world’s copper markets or the outcome of the upcoming election. Asian markets are continuing to demand copper due to higher-than-expected GDP growth and forecasts already seeing a bump in the copper market as high as 2% in 2018. Burgeoning industries, in particular green-products, will also rely heavily on the red metals to go into production.

Copper miners are now branching out into previously untapped mineral sources and investing in mines inside politically volatile areas such as the Central African copper belt. Chile’s copper industry is tantamount to an insurance policy against market dips caused by political instability elsewhere.

Chile has been the world’s top copper producer for the last quarter century and will remain a leading player for the near future. Thus, government policy regulating the state-miner will have a tremendous impact on the overall mining environment in the country, and the wider market.

Analyst Outlook: The Four Largest Telecommunications Stocks in Latin America

Moody’s outlook for the Latin American telecom industry

Mexican and Brazilian players primarily dominate the telecommunications sector in Latin America. However, experts remain bullish on the sector throughout the continent as smaller countries in the region are relatively untapped and have significant room for growth in terms of mobile and Internet penetration. Moody’s has a stable outlook for the Latin American telecom sector in 2017 as the industry continues to struggle with sluggish growth and cuts in capital investments. Moody’s forecasts EBITDA margins for the industry to decline from 35.6% in 2015 to 33% in 2018.  Marcos Schmidt, Moody’s Vice President stated, “Larger companies such as America Movil  (A2 negative), Telefonica Brasil (Ba1 negative) and Oi (Caa1 negative) will all see EBITDA minus capital spending grow at rates below the sector average, amid difficult economic conditions in Brazil, Peru and Chile, plus stiffer competition in Mexico that will slow growth and shrink margins.”

Moody’s has a stable outlook for the Latin American telecom sector in 2017 despite the industry’s recent sluggish growth and cuts in capital investments. Moody’s forecasts EBITDA margins for the industry to decline from 35.6% in 2015 to 33% in 2018.  Marcos Schmidt, Moody’s Vice President stated, “Larger companies such as America Movil  (A2 negative), Telefonica Brasil (Ba1 negative) and Oi (Caa1 negative) will all see EBITDA minus capital spending grow at rates below the sector average, amid difficult economic conditions in Brazil, Peru and Chile, plus stiffer competition in Mexico that will slow growth and shrink margins.”

The agency also expects margins of telecom companies to decline due to cut-throat competition between operators. Mexico’s telecom space has become extremely competitive ever since new regulations were introduced in 2014. Dominant players in the country are compelled to cut prices, putting profit margins under pressure. Meanwhile, “In Brazil, companies such as Telefonica Brasil and Claro that focus on the postpaid market will be more resilient than Oi and TIM, which concentrate more on Brazil’s quickly shrinking prepaid market,” Schmidt says

The four largest telecom markets in Latin America are currently Brazil, Mexico, Argentina and Chile.

Brazil

Brazil is the largest telecom market in Latin America and the fifth largest globally. The telecommunications sector contributed nearly 4% to Brazil’s GDP last year while users of mobile services grew from 41 million last year to 80.6 million in August 2017. Currently, mobile internet in the form of 3G and 4G is accessible to 98.4% of the country’s population according to Telebrasil, Brazilian Telecommunications Association.

The Brazilian telecom market is primarily dominated by four large players – Spain’s Telefónica, Mexico’s América Móvil (AMX),  and Oi, controlled by Brazilian investors and Portugal and GVT.

In the last twelve months, the telecom market in Brazil has grown by 5.9% and is dominated by America Movil, Telefonica and Oi. The market leader America Movil added nearly 200,000 connections in the past one year, occupying 31% market share, while Telefonica and Oi command 27% and 23% of the market.

Spain’s Telefonica operates in Brazil as Telefónica Brasil and has branded its landline and mobile offering under Vivo. Mexico based América Móvil group operates as mobile operator Claro and cable TV services provider Net Servicos. Oi offers landline and mobile services under the Oi brand name. GVT is the country’s most successful alternative network provider, offering landline services only.

Mexico

Mexico is the second largest telecom market in Latin America with 89 million users, representing nearly 70% of the population. The telecom sector contributes nearly 3.5% to the country’s GDP.

The local market is owned by three major players. América Móvil’s Telcel has 67% of mobile connections, while Telefónica-owned Movistar has 24%, and AT&T, after acquiring Iusacell and Nextel in early 2015, occupies 9% of the market. Since 2010, mobile operator market shares have remained largely unchanged in the country.

Argentina

Argentina is of the most developed broadband markets in South America, second only to Chile. The telecom market in Argentina is primarily dominated by Telecom Argentina, Movistar, Claro, and Telecom Personal.  The local fixed-line industry is dominated Telecom Argentina (Telecom) and Telefonica de Argentina (TA) while the broadband market is occupied by Telefonica de Argentina, Telecom Argentina, and Grupo Clarin.

Chile

Chile’s broadband penetration is relatively high compared with other Latin American countries. In the past decade, Chile has benefited from solid GDP growth as larger Latin American economies have faltered. Currently, the country has one of the highest GDP per capita income, leading to high disposable income for telecom services.

Telefónica’s Movistar, Almendral’s Entel, and América Móvil’s Claro are the largest players in Chile, operating through Nextel Chile and VTR.

Telecom stocks to consider

Year to date, the MSCI World Telecom Index has surged 0.5%. Comparatively, the MSCI Brazil Telecom Index, MSCI Mexico Telecom Index, MSCI Argentina Telecom Index and the MSCI Emerging Markets Telecom Index have returned 23.5%, 48.2%,71% and 15.1% respectively.

Looking at ETFs, the iShares Latin America 40 ETF (ILF) invests 4.9% of its portfolio in Latin American telecom stocks while the iShares Global Telecom ETF (IXP) provides 2% exposure to Latin America telecom stocks. YTD, shares of these ETFs have returned 25.6% and 3.7% respectively.

The largest Latin American telecom stocks by market capitalization are America Movil, Telefonica Brasil, Tim Participacoes Sa, Telecom Argentina and Nortel Inversora.

Year to date, shares of these companies have returned 27.5%, 11.6%, 45.72%, 84.58% and 56.7% respectively.

The largest Latin American telecom providers by revenue are America Movil , Telefonica Brasil , Oi SA, Tim Participacoes SA, and Telecom Argentina S.A. In 2016, these companies generated revenues of $52.3 billion, $12.3 billion, $7.5 billion, $4.5 billion and $3.6 billion respectively.

America Movil

America Movil (MV9.F)(AMOV)(AMXL.MX) is the fourth largest mobile network provider in the world and a Forbes Global 2000 company. Controlled by Mexican billionaire Carlos Slim, it provides 363.5 million access lines, including 280.6 million mobile subscribers worldwide.

In Mexico, its subsidiary Telcel is the largest mobile operator commanding a market share in excess of 70%. The company operates in Jamaica, the Dominican Republic, El Salvador, Guatemala, Honduras, Nicaragua, Peru, Argentina, Uruguay, Chile, Paraguay, Puerto Rico, Colombia and Ecuador through its Claro subsidiary while in Brazil it operates through Embratel and Claro. In the United States, it operates through its subsidiary TracFone. It is among the largest telecom providers in the United States. The company also own 30% of KPN, the Netherlands based telecom company and 60% of Telekom Austria Group. In 2007, America Movil acquired Jamaican telecom company Oceanic Digital. América Móvil acquired 100% of Jamaican mobile operator Oceanic Digital, under the brand name MiPhone in August 2007. On November 15, 2005, the company signed an international pact with Bridge Alliance to jointly deliver various international services.

America Movil is the largest Mexican company by revenues with annual sales of $52.3 billion in 2016. In 2016, the company owned assets of $73 billion, making it the largest company in Mexico by assets.

The company trades on the Mexican, New York and Frankfurt stock exchanges (MV9.F)(AMOV)(AMXL.MX). With a market value of over $63 billion, the company is currently the most valuable company in Mexico, more than the next three most valuable companies combined.

Telefonica Brasil

Telefonica Brasil (VIV)(VIVT3S.SA) is the Brazilian subsidiary of the Spanish telecom giant Telefónica. The company entered Brazil in 1998 while privatization of state owned Brazilian telecom company Telebras was taking place. Telefónica began their operations in Brazil under the brand Vivo in 2003 through a joint venture with Portugal Telecom. In 2015, Telefónica Brasil acquired GVT to become the largest telecom operator in Brazil.

As at June 2017, Telefonica served nearly 97.6 million customers in Brazil. The company generated revenues of $12.3 billion in 2016, pitting it against the largest global telecom players.

Oi SA

Oi (OIBR4.SA)(OIBR-C) is Brazil’s leading telecommunications service provider, and is one of the largest telecom companies in South America in terms of subscribers and revenues. The company operates through its subsidiaries Telemar and Brasil Telecom.

In June 2016, the company filed for a $19 billion bankruptcy protection, the largest so far in Brazil. The in-court reorganization has been slowed by ongoing disputes between creditors and shareholders.

In 2016, the company serviced 63.6 million customers and generated $1.1 billion in revenues. The company trades on the Brazilian and New York stock exchanges and has gained 59% in 2017 so far.

Tim Participacoes SA

Tim Brasil is the Brazilian arm of Italy based telecom provider Telecom Italia Mobile (TI). The company has nearly 61.3 million customers in Brazil and is the first mobile company to service all states in the country.

In the last twelve months, TIM was the fastest growing broadband operator in the country growing its subscriber base by 21% to 378,446. TIM is the fifth largest broadband player in Brazil with a market share of 1%. In 2016, Tim generated revenues of $8.8 billion, third highest among Latin American telecom companies.

Shares of the company are listed on BM&F Bovespa (TIMP3.SA) and NYSE exchanges (TSU) and have gained 46% in 2017 so far.

Analysts opinion

Analysts are wary of telecom companies in Latin America’s largest economies – Brazil and Mexico – as they struggle with political and economic uncertainty.

Recently, BTIG initiated coverage on Latin America’s largest telecom company America Movil with a neutral rating raising doubts in its ability to manage its shareholder’s returns along with its massive debt burden. However, the research house is bullish on Telefonica Brasil.

Analyst Walter Piecyk mentioned in a note to investors, “The bankruptcy filing of Oi closes another chapter in the development of the wireless market in Brazil and could mark a turning point for the industry. Investors have shown little interest in the Brazilian wireless industry in recent years given the economic and political turmoil combined with the inability of the wireless industry to consolidate … Telefonica Brasil, which uses the Vivo brand in Brasil, remains the safest way to play Brasil telecoms given its diversified business, synergy opportunity and strong management team. Its stock has materially outperformed TIM Brasil, resulting in what now might be an unwarranted valuation premium …

America Movil’s total enterprise Value is slightly over 5x our 2017 EBITDA estimate in a year that we expect no growth. The stock price also implies a free cash flow yield of 7%, but primarily because of the more than 20% cut in capital investment expected this year, which we believe could have longer term negative implications for revenue growth potential. America Movil sometimes issues special dividends, but given the lack of free cash flow growth at the company and share repurchase we estimate a dividend yield of less than 3%this year and next,” the note continued.

Shares of America Movil have received 4 buy ratings, 2 sell ratings and 11 hold ratings. In comparison, Telefonica Brasil has received 13 buy ratings and merely 4 hold ratings. Telefonica Brasil has received no sell ratings. TIM has received 4 buy ratings, 2 sell ratings and 11 hold ratings. Analysts are most bearish on shares of Oi after the company filed for bankruptcy protection last year. The company has received 2 hold ratings and 3 sell ratings.

Valuations within the Latam telecom sector are stretched with average one-year forward PE ratio of 23x.

Nortel Inversora (NTL)(NORT6.BA), Cnt Telefonica Del Sur (TELSUR.CI) and Telecom Argentina (TEO) are the most attractively priced telecom stocks based on their cheap valuations. These stocks have one year forward PEs of 3.4x, 7.4x and 17x, and are trading at the steepest discount to their peers. Meanwhile Almendral Sa, Empresa Nacional De Telecom (ICA) and Atom Participacoes (ATOM3.SA) are expensive stocks.

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.

This Nation Has One of the Healthiest Mortgage Markets in Latin America

Mortgage market in Chile

Chile (ECH) is among a handful of Latin American (ILF) markets poised for growth and urbanization. The scale of middle-class expansion in Chile is noteworthy. This is also giving the required boost to real estate and infrastructure investment in the economy.

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Chile boasts one of the healthiest and largest mortgage markets in Latin America. The mortgage market makes a solid 22-23% contribution to the economy’s GDP, as compared to the 9% contribution that Brazil’s (EWZ) real estate market has towards its GDP. The rating agency Moody’s has a positive outlook on Banco del Estado de Chile, the largest mortgage lender in the economy. The bank is 100% owned by the Republic of Chile. It plays an important public policy role by catering to low-income individuals with an explicit mandate towards promoting home ownership. The bank has ample holdings of high-quality liquid assets and its non-performing assets ratio has also been declining.

Economic indicators shed positive light

Housing starts in Chile had also crossed 12,000 in March 2017, well above the near 8,000 per month level seen for the majority of 2016. Consumer spending is also rising, which is again a good sign for real estate development. The stock market, as tracked by the iShares MSCI Chile Capped ETF (ECH) is up about 15% YTD (as of May 11).

Chilean (ECH) infrastructure has contributed notably to the above 10% growth recorded by the iShares Emerging Markets Infrastructure ETF (EMIF) so far this year. Equity that was part of the ETF gained 24.2% YTD (as of May 5). Chile’s Enel Americas SA (ENIA) was the sole contributor to the return.

Infrastructure Binge in Latin America Yields Big Returns To ETFs

Infrastructure ETF yielded over 10% YTD

The iShares Emerging Markets Infrastructure ETF (EMIF) is up 10.9% YTD (as of May 5). The fund currently has over $47 million in assets under management and invests in an index composed of 30 of the largest emerging market equities (EEM) (VWO) in the infrastructure industry, the S&P Emerging Markets Infrastructure Index.  The ETF is heavy on Brazil (EWZ), Hong Kong, and China (FXI) (YINN), which command 23.8%, 20.56%, and 13.5% respectively, of the EMIF portfolio.

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Top emerging market performers: Mexico, Chile & China

Deeper insight into the ETF’s YTD performance indicated that the ETFs performance was largely driven by Mexico (EWW) infrastructure equity which returned 32.3% YTD. The three ADRs of the company Grupo Aeroportuario gave the required boost to the portfolio’s performance. Grupo Aeroportuario del Centro Norte, S.A.B. de C.V. (OMAB), Grupo Aeroportuario del Pacífico, S.A.B. de C.V. (PAC), and Grupo Aeroportuario del Sureste, S. A. B. de C. V. (ASR) have returned 30.3%, 27.6%, and 38.2%, respectively YTD.

Chile (ECH) infrastructure equity gained 24.2% YTD. Chile’s Enel Americas SA (ENIA) was the sole contributor to the return. Hong Kong and China infrastructure equity stand next, with a 13.2% and 12.6% return respectively, YTD. From China, Beijing Capital International Airport (BJCHF) (BJCHY) has risen 38.5%, while Zhejiang Expressway (ZHEXY) has returned 29.2% YTD.

Investing in infrastructure could be expensive

From a valuation perspective, infrastructure equity across the best-performing markets is currently very expensive. Mexico maintains a 27.2 price to earnings (P/E) multiple, while Chile, Hong Kong, and China are trading at a 26.8, 15.6, and 33.0 P/E respectively.  Among these, Chinese infrastructure equity offers the highest dividend yield of 3.7%.

From our analysis of these two ETFs, we see China and Mexico as major contributors to the surge in emerging market real estate indices. We also see Mexico and Chile contributing most substantially to the rise in emerging market infrastructure equity. We’ll reveal more perspective on each of these markets as we move ahead in this series.

Why Money Managers Are Rejigging Their Latin America Portfolios From Mexico To Brazil

 

Strong inflows into Brazil ETFs; Outflows from Mexico

Brazil’s efforts to revive the recession-stricken economy are closely monitored by fund managers and institutional investors. Meanwhile, Mexico continues to struggle under Trump’s uncertain protectionist policies. Venezuela and Chile are also reeling from political issues. However, Latin American funds have seen strong inflows in 2017 as expectations of structural reforms drive inflows into the region.

Among the funds investing in Latin America, the iShares Latin America 40 ETF(ILF) has seen the highest inflows, amounting to $378 million since 2016. Comparatively, the SPDR S&P Emerging Latin America ETF (GML) has received a mere $1.5 million inflows during the same period. Year to date these funds have received inflows of $133 million and $5.1 million, respectively.

Foreign investors are also betting on individual countries in the Latin American continent even though many are braving poor economic growth and political tensions.

Investor interest in Brazilian equities has been high given lofty inflows over the past one year standing at $1.8 billion. YTD investors have plowed in $795 million in the iShares MSCI Brazil Capped ETF (EWZ).

In contrast, Mexico has seen heavy outflows in 2017 as Trump’s anti-migrant policies have hampered foreign interest in the country. YTD investors have redeemed $813 million from the iShares MSCI Mexico Capped ETF (EWW).

3 Sectors To Steer Clear From When Investing In Latin America Equities

Sectors to consider when investing in Latin America

To understand which sectors in Latin America have performed best, we studied the portfolios of the largest Latin America focused ETF — the iShares Latin America 40 ETF (ILF). This ETF invests 34% of its portfolio in the financials sector, 16% in the consumer sector, 15% in basic materials, and 12% in the energy sector. Further, 52% of its holdings are concentrated in Brazil (EWZ) equities with Mexico (EWW) and Chile (ECH) having 24% and 8% of exposure, respectively.

In 2017, the top three performing sectors in Latin American equities have been:

  • Transportation
  • Chemicals
  • Electric

The transportation sector constitutes 0.1% of the ILF ETF. Year to date, transportation stocks have returned an average of 27% in the ILF portfolio. Aramex (ARMX), the Dubai-based logistics company, has driven the high returns for the sector.

The chemicals sector makes up 0.7% of the ILF ETF. Year to date, chemical stocks in the ILF portfolio have returned 18.4% on an average. Sociedad Química y Minera (SQM), the Chile-based chemical company has led returns in this sector.

The electrical space consists primarily of 4 stocks. During the year so far, electrics stocks in the ILF ETF have gained 16.3% on an average. ADRs of stocks like Enel Generacion Chile (EOCC), Cia Energetica De Minas Gerais S.A (CIG), Enel Americas (ENIAN) and CPFL Energia (CPL) have climbed 19.2%, 21.5%, 18.9% and 5.7% respectively.

The worst performing sectors in Latin America in 2017 have been:

  • Real Estate
  • Food
  • Engineering

Year to date, stocks in these sectors have plunged 7.3%, 6.9%, and 6% respectively.

The Best And Worst ETFs For Investing in Latin America

Investing in Latin American equities

Directly investing in Latin American markets can be risky for foreign investors as most of the countries are frontier markets. ETFs investing in Latin America stock markets are largely concentrated in two major markets – Brazil and Mexico. While some countries have opened up their stock markets to foreign investors, these economies remain difficult to access due to illiquidity and poor trading exchanges.

Investors betting on the revival of Latin American economies have two options. They can either consider investing in ETFs providing exposure to the entire Latin American region or place their bets in the continent’s largest markets through country-focused ETFs.

Regional ETFs

The iShares Latin America 40 ETF (ILF) provides exposure to the overall Latin American region but 80% of its holdings are concentrated in Brazil and Mexico, followed by Chile, Peru and Colombia. It invests in a portfolio of the 40 largest companies in the region, which are more than 50% dedicated to the financial and consumer defensive sectors. YTD, this ETF has climbed up 14%.

Another popular Latin American ETF is the SPDR S&P Emerging Latin America ETF (GML). This ETF invests in a basket of 245 stocks, thereby providing larger exposure to various stocks in the region. YTD this ETF has gained 15.1%.

Country ETFs

Investors seeking concentrated exposure in specific countries can consider investing in the following country ETFs:

  • iShares MSCI Brazil Capped ETF (EWZ)
  • iShares MSCI Mexico Capped ETF (EWW)
  • iShares MSCI Chile Capped ETF (ECH)
  • Global X MSCI Argentina ETF (ARGT)
  • iShares MSCI All Peru Capped ETF (EPU)
  • iShares MSCI Colombia Capped ETF (ICOL)

ETFs investing in Brazil have outperformed in the last two years as the country continues to recover from a recession. YTD the iShares MSCI Brazil Capped ETF has gained 13.4% as investors are pinning their hopes on reforms in a recession-struck country.

ESG Scorecard: Czech Republic, Taiwan & Poland Are the Top 3 Emerging Markets

According to RobecoSAM’s October 2016 survey judging the sustainability of economies based on environmental, social, and governance (ESG) indicators, the Czech Republic leads while Nigeria (NGE) lags the global ranking of the 62 countries surveyed. With an overall score of 6+ (out of 10), the Czech Republic leads the emerging markets (EEM) (VWO) on environmental, social, and governance or ESG indicators.

The Czech Republic leads the performers

The Czech Republic (EWEM) ranked 20 on the country sustainability ranking as per RobecoSAM October 2016 survey. Closer introspection reveals that the Czech Republic scored 5+ under all heads, that is, governance, social & environmental; while scoring particularly well on the world risk index and political stability indicators.

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Moreover, leading indicators suggest that the Czech economy is experiencing a phase of healthy expansion, with manufacturing growing steadily and consumption supported by a tight labor market and rising wages. The Prague stock exchange index has returned 10.2% YTD (as of April 24), with the materials sector company, Unipetrol AS (UNPTY) up 37.27%, and Central European Media Enterprises Ltd. (CETV), and Fortuna Entertainment Group up 33.86% and 30% YTD, respectively, from the consumer discretionary sector (which is up 20%). The market is relatively cheap trading at a price to earnings multiple of 13.31; with stocks of Unipetrol AS and Fortuna Entertainment Group trade at a P/E of 5.74 and 22.52, respectively. Central European Media Enterprises Ltd. trades on NASDAQ under the ticker CETV. The ADR has returned 43.35% YTD; 28.26% over the past month (as of April 24).

Other sustainable emerging markets

At rank 21, Taiwan (EWT) too scored well on the ESG indicators, having scored particularly high on the governance indicators such as political stability, corruption, and competitiveness.

Poland (EPOL), South Korea (EWY) & Chile (ECHare the other emerging markets that rank well on the ESG barometer. At ranks 26, 27, and 30, respectively, these markets boast of:

Poland: a 5+ score under all three heads, an appropriately balanced economy

South Korea: a socially sustainable and positive economy with a 6+ score on social indicators such as the human development index, and social unrest.

Chile: At rank 30, Chile scored particularly well on governance metrics.

Let’s now take a look at the laggards in the ESG rankings.

Escondida Strike Less Damaging To Chile’s Copper Output Than Thought

A historically long 43-day strike at BHP Billiton’s (ASX, NYSE:BHP) (LON:BLT) Escondida copper mine in Chile, the world’s largest, will have less of an impact in the country’s overall annual production that originally though, experts say.

While the country’s central bank said on Monday that the stoppage would knock an entire percentage point off GDP growth in the first quarter, analysts at BMI Research argue that the nation’s copper sector will return to growth by 2018.

“We have revised down Chile’s copper production forecast, from 1% growth in 2017 to a modest 1% contraction due to the estimated losses from Escondida and a lack of any significant new capacity expected to come online over the coming quarters ,” BMI researchers wrote on a note Wednesday.

They now expect Chile, which accounts for more 30% of the world’s copper supply, to produce 5.4 million tonnes of the metal this year, slightly down from the 5.5mnt it yielded in 2016, returning to gradual production growth thereafter.

One option the government is studying to support output could be to offer tax incentives or modify regulations to encourage miners to free up exploration contracts they do not use, mining minister Aurora Williams told MINING.com last month.

BMI warns that the country’s rigid labour market will pose considerable challenges to copper miners looking to keep costs low and improve margins amid price volatility this year.

Upcoming contract negotiations, for which the Escondida strike set a tense tone, include Anglo American’s and Glencore’s Collahuasi mine and Antofagasta Minerals’ Zaldivar.

The scheduled talks, BMI analysts say, may be even tougher than the recent failed negotiations at Escondida, as Chile’s new labour law — which comes into effect this month — strengthen union positions by preventing firms from reducing previous benefits.

Despite the potential hurdles, the experts remain positive on the country’s mining industry outlook over their forecast period to 2021.

 

Cecilia Jamasmie is a news editor at MINING.com.

Chile Powers Back After An Unimpressive Four Years, But Hopes Still Pinned on Mining

Making it to the top five

For a country whose macroeconomic picture is far from rosy and is battling a charged up political environment, Chile has done quite well when it comes to stock market performance.

Stocks from Chile cap-off this series looking at the top five emerging markets for Q1 2017. The MSCI Chile Index has gained 15.37% for the period, close behind Mexico. However, unlike Mexico, the Index has returned 16.3% in the one year period until March.

Economic and political matters

Economic growth in Chile has been unimpressive for the past four years. Business confidence has been low and some moves by the government, like an increase in taxes, have attracted a backlash from the business community which holds these decisions responsible for worsening the investment scenario in the country.

These and other issues are coming to the fore because the country is headed for elections in November this year, with primaries scheduled for April and July.

Meanwhile, for a country driven by copper, recent developments have been detrimental to its economy. According to World’s Top Exports, Copper and its ores formed a little less than half of Chile’s total exports in 2016. Chile is home to the world’s largest copper mine, Escondida, which produces 5% of the world’s copper.

The mine, majority-owned by BHP Billiton, was on a 44-day strike – an event which has unnerved the copper industry. Given the importance of copper exports to Chile, this strike could possibly push the economy to the brink of a recession.

However, as seen from the returns above, Chilean stocks have continued to do well.

Investor interest and what’s in store

US investors have not evinced much interest in Chilean stocks. The lone ETF listed on US exchanges investing solely in stocks from the country, the iShares MSCI Chile Capped ETF (ECH), has attracted net inflows amounting to $24 million in YTD 2017 according to Bloomberg data.

Going forward, investors need to take into consideration the macroeconomic developments in the country, especially in light of the copper mine strike, as well as the valuation of Chilean equities. At a price-to-earnings ratio of 17.82, the ECH is not cheap.

It’s All Blue Skies, Not Bumpy Roads for Latin America

Blue skies ahead

Arthur Rubin, Head of Latin America Debt Capital Markets, SMBC Nikko Securities America, Inc., who was recently interviewed by Bonds & Loans, sees all blue skies ahead for Latin America, no bumpy roads. Over the past 18 months, whenever we’ve seen some event causing credit spreads to widen, it has usually been very short-lived, said Rubin. He sees two major tailwinds boosting Latin America to blue skies.

Economic Tailwinds

The rally in copper and base metals is already having a positive spill-over effect on Latin America (ILF). And the markets expect the rally to go on. So, if there is a re-pricing or correction, it may have serious ramifications for economies like Peru (EPU) & Chile (ECH), believes Rubin.

Moreover, governments in both Colombia and Peru are focused on infrastructure. In Peru, Rubin sees a lot of things going on in the power sector, more infrastructural development in the energy refining and power generation space. In Colombia, policy direction is going the right way, and the government is making strides in bringing inflation back down to levels near its target.

The risk that remains for Latin America currently is of Chinese (FXI) (YINN) growth underperforming. At the end of the day, the rally in commodities owes a lot to the perception that China is back on a more stable growth path. If the pace of growth in China falls short of expectations, it would affect the recovery in commodity prices, and consequently commodity dependent Latin America economies.

Political Tailwinds

Left-wing leadership, often associated with ‘populism’ as opposed to ‘conservatism’, seems to be taking a back seat in Latin America.

  • Argentina is doing better under the aegis of its new right-wing president, Mauricio Macri
  • Mexico is being led by its right-wing president Enrique Pena Nieto since December 2012.
  • Conservative Michel Temer holds the office of the President of Brazil since August 2016.

In Chile, billionaire Sebastián Piñera of the conservative Chile Vamos coalition is seeking to return to presidency in November this year, as the left-leaning governing coalition is already in disorder.