A Split Decision For The Chile ETF

The iShares MSCI Chile ETF ECH is up a lackluster 3 percent year-to-date — "lackluster" because the lone exchange traded fund dedicated to Chilean equities is trailing the MSCI Emerging Markets Index by more than 200 basis points.

That is after ECH gained 41.8 percent in 2017, outpacing the emerging markets benchmark by 450 basis points. Some analysts and market observers see tailwinds and challenges for Chile's economy and equity markets this year.

“Chile's new president Sebastian Pinera has inherited a recovering economy benefiting from external tailwinds but may have limited political scope and capital to enact pro-growth reforms and accelerate fiscal consolidation,” Fitch Ratings said in a note out Thursday.

“We expect Chile's growth and fiscal outlook to improve over the medium term, but public debt metrics are unlikely to return to their prior low levels and per capita income will likely remain below the 'A' rating category median. Fitch affirmed Chile at 'A'/Stable last month.”

Resisting Copper's Struggles For Now

Chile is the world's largest copper producer, and the commodity is struggling to start 2018. For example, the iPath Bloomberg Copper SubTR ETN JJC is off 6.1 percent in the first quarter, indicating that ECH's modest year-to-date gain is perhaps more impressive than initially meets the eye.

The $491.7-million ECH allocates just 12 percent of its weight to materials stocks, its third-largest sector weight, but there is no denying copper is a major driver of Chilean economic performance.

Copper accounts for about 10 percent of the country's GDP, according to the U.S. Department of Commerce's International Trade Administration. 

“Low copper prices were one of the principal causes of the economic downturn in the past several years, leading to a sharp contraction in mining investments and broader spill-overs,” said Fitch.

Political Problems

ECH probably will not face political volatility on par with some other single-country ETFs, but a lack of a governing majority for the Pinera administration is still a possible concern for investors.

“The ability of the new administration to enact reforms to lift Chile's potential growth rate may be constrained by its lack of a legislative majority and a more fragmented party landscape in congress following the November general elections,” said Fitch. “These legislative challenges, combined with Pinera's relatively modest share of the vote in the first round of the presidential election and low voter turnout, suggest a relatively limited political mandate for business-friendly reforms in Fitch's view.”

ECH has a three-year standard deviation of 20.42 percent, or 400 basis points above the same metric on the MSCI Emerging Markets Index.

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Photo by Javier Rubilar/Wikimedia.