Everyone's talking about investments in South America, and while Brazil is getting most of the attention, Chile offers several catalysts that I believe continue to make it an attractive investment destination.
One big theme for Chile is that it is copper rich and that
around the world helps to build up the infrastructure of ascending countries.
Places like China are not immune from economic or stock market cycles, so perceptions of spending on infrastructure will ebb and flow. But there will be plenty of flow for years to come, and Chile will benefit.
The other big catalyst is that Chile has what amounts to a privatized social security program. Roughly half of Chile's workers put 10% of their annual income into individual, self-managed pension accounts. This has been mandated by the government since 1981 and is viewed by some as a successful program that creates ongoing demand for equities with plenty of long-term visibility.
The combination of copper and mandated contributions makes Chile a less volatile way to access the emerging market/commodity theme; a Brazil-lite, so to speak.
iShares MSCI Chile Fund
has been less volatile in both directions than
iShares MSCI Brazil Fund
since ECH's inception. This was one of the points I made in previous articles, which has been playing out thus far and I believe will continue to play out in the future.
Because Chile is a commodity-based country, it tends to be at different points in economic and stock market cycles than the U.S. That has provided a zig-zag effect for equity prices in previous cycles and also in the current cycle.
ECH went up during February and March as the
was declining. Chile provided a similar effect in 2001, as it went up as the S&P 500 headed lower. Over the last few months, ECH has moved down, as it did in 2002, so this is not a case for true decoupling -- just the chance to offset part of the effect of a U.S. bear market.
ECH's sector makeup has changed since my last article because of the performance dispersion between resource-related stocks and just about everything else. Now, ECH is heaviest in materials at 26.06% (up from 18.09%), utilities 25.68% and industrials at 17.13%.
ECH does take some stock risk with four stocks having 9%-plus weightings and two more with 7% weights. This underscores the potential for volatility, but still, Chile has proven itself as being less volatile than the more popular Brazil.
ECH has a 0.74% expense ratio. It yields a decent, not high, 2.33%.
While the case for Chile is compelling, it isn't a one-way trade. In the last few months there have been issues with inflation, rising rates and questions about electricity generation.
Also, the stocks are not cheap as emerging markets go. According to the iShares Web site, ECH has a P/E ratio of 21.14. A few years ago, single-digit P/Es were the norm for emerging markets.
Chile has proven itself a couple of times this decade of being capable of providing real diversification for U.S.-based investors. If you think that is likely to continue, Chile becomes a compelling hold. ECH lets you capture the general effect without taking single-stock risk.
At the time of publication, Nusbaum had no positions in the securities mentioned, although positions may change at any time.
Roger Nusbaum is a portfolio manager with Your Source Financial of Phoenix, and the author of Random Roger's Big Picture Blog. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Nusbaum appreciates your feedback;
to send him an email.