Chile: Calm Among The Storm Or Falling Knife?
As is the case with so many emerging markets ETFs these days, the iShares MSCI Chile Investable Market Index Fund (NYSE: ECH) is officially in bear market territory. Trading just above $59, ECH resides almost 24% below its 52-week high and there are other technical red flags to consider in the near-term.
The ETF was rebuffed not once, but twice earlier this year around $70, indicating a double top and some stiff resistance for the $586.5 million fund to deal with down the road. ECH has also been decimated by an overall decline in sentiment toward emerging markets equities and speculation about China's slowing economy.
With a weight of 17.6%, materials stocks are the third-largest sector weight in ECH, but Chile is the world's largest copper producer and copper production and sales account for a substantial portion of government revenue there. Translation: China's woes have become Chile's woes as copper prices now rest at multi-month lows.
For the adventurous and patient, there is opportunity with Chilean equities and ECH. Fortunately, there are legitimate points in favor of Chile bulls, including the country's political stability, a catalyst highlighted by Colombia-based independent analyst Caiman Valores in an interview with Benzinga.
"I believe the country risk for Chile is very low and similar to what you would expect when investing in Western Europe," Valores said. It has a stable democracy, it has a low corruption indicator and a strong and transparent institutional and legal framework."
In other words, it can be said that Chile is more hospitable to international investors than say Argentina or Brazil. As has been noted plenty of times in recent months, Argentina's nationalist tendencies are alive and well and Western companies such as Chevron (NYSE: CVX) and Transocean (NYSE: RIG) are learning firsthand how tricky the political climate in Brazil can be.
Not to mention, Chile's inflationary pressures are arguably benign compared to other Latin American countries.
"The economy is stable and it doesn't have the inflationary issues of Colombia, Brazil and Argentina. The sovereign risk is low," Valores said.
Still, misconceptions remain about ECH and Chile, the "C" in our prestigious CAPPT emerging markets acronym. Despite its advancing economy and healthy banking sector, Chile is frequently lumped in with South America's higher-risk, materials-intensive emerging economies.
"I believe that many U.S investors have a lot of misconceptions about Chile and are very ignorant of its investment potential," Valores noted. "There is very little investor interest because it is not a headline catching country like Colombia, Argentina or Brazil. Yet it gives investors similar investment returns with similar GDP growth rates with a quarter or less of the country risk."
Valores is bullish on Chilean banks, a sector that accounts for almost 18% of ECH's weight. The analyst said investors looking for Latin American bank stocks should not look past Bacno Santander Chile (NYSE: BSAC) or Banco de Chile (NYSE: BCH). Those two stocks combine for about 11% of ECH's weight.
Noteworthy is the fact those two Chilean banking giants have superior margins, price/earnings growth rates and debt/equity ratios to some of their U.S. counterparts. Both have A credit ratings, which is better than Citigroup's (NYSE: C) A-.
Bottom line: ECH needs to hold the $58-$60 area and then makes it way to $63 to bolster its technicals. The good news might just be the savage beating the ETF has taken in recent weeks indicates the darkest clouds have already passed ECH and the aforementioned bull catalysts for Chile have been ignored. Those catalysts cannot be ignored forever.
Traders who believe that ECH is poised to rebound, might want to consider the following trades:
- Own the ETF outright and use covered calls as a hedge.
- Sell long-dated puts to fund the purchase of long-dated calls.
- Buy the Global X FTSE Andean 40 ETF(NYSE: AND), which offers combination exposure to Chile, Colombia and Peru.
Traders who believe that ECH is in for more downside may consider alternative positions:
- Long the Direxion Daily Latin America Bear 3X Shares (NYSE: LHB).
- Long the ProShares UltraShort Brazil (NYSE: BZQ).
- Short ECH below $55
© 2015 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.