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Markets are a reflection of what is happening – and what is expected – in the economy, in companies and on the political scene. The latter has been particularly relevant a little over a year ago, with the social explosion. And what happens today in the constitutional plebiscite will also be. Investment banks know this, so it is not surprising that their reports to clients mix typically financial concepts such as Ebitda, margins and ratios, with political forecasts and analysis of how a possible new Constitution should turn out.
But today is a scene from a movie that began 12 months before, with the social explosion, and whose script has yet to be elucidated. That is synonymous with uncertainty. The unknown for investors translates into risk. The consequence is punishment for Chilean assets.
Thus, in the midst of the uncertain scenario created by the social crisis and the political discussions that are underway, the pandemic had a greater impact on local assets compared to the markets of Latin America. From October 18 to date, the Santiago Stock Exchange accumulates a 26.66% drop in local currency, while measured in dollars (to make it comparable with other indices) the collapse reached 32.88%, with the IPSA -index that groups the companies with the largest stock market presence- in third place on the list of the worst performing exchanges in the world in that period.
But that is not all. The IPSA trades at a book-to-market ratio of 1.1 times, compared to the ratio of 1.4 times prior to October 18. This means that stocks are cheaper than before the outbreak. The dollar has also been a thermometer. It reached an all-time high of $ 868.6 on March 18, and is currently at $ 776.9 (averaging $ 713 the week prior to October 18, 2019), reflecting investor appetite for the greenback. in the face of uncertainty.
The better numbers of the infections of the virus and the gradual reopening of the national economy are not enough factors for investors to return to fix their eyes on the local market. “Chile ranks with the lowest number of cases and deaths in Latin America and stands out among the countries with the lowest mortality rate. Chile’s contagion curve is lower than that of the countries in the region under our coverage ”, he wrote JP Morgan during the week. However, the investment bank explains that “political uncertainty prevents us from assigning a recommendation to overweight Chile.”
In addition, the outbreak and the Covid found the country with accelerated spending in recent years, which changed the perception that risk rating agencies and investors had of Chile. Therefore, Fitch lowered the sovereign rating this month.
The relationship between politics – and its stability – and markets is ancient and can be traced back to the history of the Chilean elections. The greatest daily variation as a result of an unexpected or not fully internalized political event was in the 1988 plebiscite. After the triumph of No, the local stock market contracted 16.7% the following day. Then came years of minimal post-election reactions. In some cases, because there were no surprises; in others, because it was understood that there was continuity. You have to travel until the first presidential round of 2017 to find an abrupt movement. The market was surprised by the less comfortable result in favor of Sebastián Piñera, and the IPSA fell 5.9% the following day. In the second round, the opposite effect occurred: due to the forcefulness of their victory, there was a 6.9% increase.
In 2019, political-social events moved the market. After October 18, the stock market fell 4.8%, while on November 15, after the political agreement that led to the constitutional process, it climbed more than 8%.
Thus, with these numbers on the table, the analysts of the stock brokers have incorporated the facet of political analysts and have their forecasts for the process that Chile is starting.
This is why the large investment banks have already played their cards and determined their base scenario, with the aim of avoiding major surprises in what may happen today. Of course, there are always risks that cannot be foreseen. Investors’ doubts are how comfortable the approval will be – they assign it between 65% and 70% of support-What percentage will the constituent and mixed convention obtain, and if the polarization of the citizenry – and the violence – will continue.
A relatively positive position is the one that has Bank of America, as analysts emphasize that the perception of risk towards Chile registered an improvement in the recent month. The investment bank explains that in its latest survey of the main fund managers in the region, 43% of the participants see some deterioration in Chile’s economic model due to a new Constitution, compared to 68% in September. “A new Constitution would probably not lead to drastic changes, as we argue that there are cultural and legal limitations to a complete change in the current economic model,” says BofA.
Although other actors are not so optimistic. “The process runs the risk of incorporating uncertainty into the pillars of a system that allowed the country to overcome years of stagnation and poor economic performance, amid the challenges of the pandemic. The constitutional debate will constitute a decisive milestone, since it will define whether Chile will reestablish convergence towards the developed economies or whether it will continue to deviate towards the infamous middle-income trap ”, he concludes JP Morgan.
The american bank Wells fargo adds a note of suspense to the script. It does not question the approval to draft a new Constitution, an alternative to which it assigns 70% supportHowever, it says that, although this scenario is incorporated in asset prices, the gap between the constituent and mixed option could be greater than what the market anticipates. “My concerns revolve around the constitutional convention. I believe that ultimately the citizens will vote for a constituent convention, but the vote will be much closer than what the market expects or currently sets in prices at this time. I believe it is possible that there will be protests after the elections, that will lead to new pressures on assets and the Chilean peso, ”says Wells Fargo emerging markets analyst Brendan McKenna.
More direct is the private investment bank Julius Baer. He is concerned about the “quality” of the resulting Magna Carta, which he believes could accelerate the downward trend in GDP growth observed since the end of the commodity supercycle. “The shares are valued attractively relative to their track record. However, the constitutional debate will continue to weigh on local asset prices for the next few months, if not years, keeping flows on hold, ”the Swiss bank said.
ScotiabankMeanwhile, it sets its sights on another parameter: participation. The Canadian bank makes a parallel with what happened for the elections of Sebastián Piñera and the uncertainty that a similar scenario would entail. “If only a few people vote, this story has a problem. The reference is the participation rate that was registered in the second round of the last presidential elections, where only 49% of the electoral roll voted. A greater or equal number would indicate that the citizen hypothesis for this plebiscite has some support. But if the number is less, it would be difficult to say that this hypothesis is valid. Participation will be essential, because if “Yes” wins, there would be an additional exit vote to ratify the text of the new Constitution, which would be a mandatory vote. If less than 50% of the electoral roll votes now, the implications for the future exit plebiscite are difficult to anticipate”, Concludes the entity.
With all these forecasts, the market recognizes that Any better than expected result for the Reject will be read positively in the market. Sura Inversiones indicates that the available surveys indicate that the approval would have an adherence greater than 65%. This, according to the manager, is what is included in asset prices today. “If everything turns out – with some degree of slack – as the polls dictate, we consider that the effects on assets should be limited, as long as we have a day that is characterized by being peaceful, as the electoral events in our country have been characterized. country in the last decades ”, indicates Sura.
Thus, a support for Rejection of more than 40%, according to JP Morgan, would be a positive surprise for the market., since it would decrease the tension regarding the future constitutional discussion.
Market reactions will depend, then, on multiple variables that will be, in part, defined today.
