How To Short South American Socialism

Socialism was once a term in the United States that, if associated with, let's say a political opponent, would constitute an accusation worthy of aggressive denial. But even in this land long faithful to the free-market, a Gallup poll this year found that 39% of Americans hold a positive opinion of socialism, compared with 57% who hold a negative opinion. While a minority, that level of support for “Socialism” would be unthinkable even a decade ago. Of course, most of these so-called Socialists aren’t looking to dismantle capitalism in favor of some Marxist utopia—they just want things like paid child leave and health care and maybe a few weeks of vacation. Think Sanders, not Guevara.  

But this week, an election in Chile was a win for socialism of the more traditional kind. And by traditional, I mean that the president-elect Gabriel Boric of the Social Convergence Party may be the most radical leftist since Salvador Allende. Sadly—and what we hope is not an omen to come for other nations—the choice was between him and José Antonio Kast of the Republican Party, a son of a former German officer accused of having ties to the Nazi Party. If Boric can be compared to Allende, Kast can be compared to Pinochet. Sophie's choice, indeed (pardon the pun of poor- taste).  On news of the election results, the nation's peso fell another 3.2%. It is down now 18.5% this year, while the Chilean benchmark index (SPIPA) closed down 6.2% after falling as much as 7.45%. The MSCI Chile stock index (MICL00000PUS) fell 10.45%, suffering its worst daily drop since May when Chileans elected a constitutional assembly dominated by leftist and independent representatives. While this electoral triumph of Socialism might not bode well for Chileans—especially Chilean investors—it does offer Capitalists here and around the world an opportunity to bank on the forthcoming failure of Chilean equities. 

Shorting Santiago Stocks While there is by no means a plethora of Chilean ADRs from which to choose, there are a few big stocks and ETFs that investors betting against Chilean markets can trade. The broadest play is the iShares MSCI Chile ETF (ECH), which plunged 11% on Monday. While up over 2% as of midday Tuesday, expect a downward trend longer-term after a mild short-term uptick. The options only go out as far as January 21, 2022. Investors may want to look to buy now while puts are cheaper on the ETF's price appreciation today. Buying a put option expiring on January 21 at a strike price of $21 at the bid of $.30 per contract is an option worthy of consideration.  Curbing Copper  During his campaign, Boric pledged to raise taxes, throw out the existing private pension system and, perhaps most importantly to investors, oppose mines that damage the environment.

As the largest copper producer in the world, copper and mining ETFs and equities will be an enticing play to bet against when the president-elect's new policies are both announced and implemented.  The BI Global Copper Competitive Peer Group index of producers fell as much as 3% just on news of the election, although, like plays with exposure to Chile, it has gained a bit of ground today. Mining equities heavily engaged in Chilean copper, such as Lundin Mining Corp. (LUNMF) fell Monday even as the price of copper rose.  However, I would stay away from shorting copper stocks for now, irrespective of the companies' Chilean exposure. Instead, a way to bet wholesale against socialism in Santiago is to bet against the Banco de Chile (BCH). There are no options available to trade on the ADR, but if you look to short the stock you would not be alone. BCH has seen a major uptick in short interest, according to Marketbeat, since November. As of November 30, there was short interest totalling 408,600 shares, a growth of over 21% from November 15. While there is always a chance that the Reddit crowd will promote a beleaguered Chilean bank short squeeze, it's unlikely. Now, if you come across some company called "AMC Chile," that’s a different story, altogether.