The spotlight is on Chile in the latest of InvestmentEurope’s LatAm series. Alan Nesbit, Latin America specialist at First State Investments, explains why consumer growth is more important to investing in Chile than its booming copper mines.
The pension funds’ reduced stranglehold on the market has opened up new stock-picking opportunities for Nesbit’s fund, such as a Chilean water utility which delivers water and collects sewage.
Utilities stocks are particularly attractive as the rule of law and regulation is “very clear and unambiguous,” Nesbit adds. This is not always the case elsewhere in Latin America, where “regulations can change on a whim.”
The growing number of opportunities in the utilities sector is tied to the “powerful demographic trends” currently under way in Chile. Disposable income is increasing and its middle class is growing. As consumer expectations rise, so does demand for housing, water, electricity or internet providers.
Comparatively speaking Chile’s middle classes have “emerged” more than its neighbours rendering its growth story is less pronounced, but Nesbit believes this means its evolution will not be as volatile as Brazil or Mexico’s.
Although copper mining is one of Chile’s big economic success stories, Nesbit dislikes mining stocks. Key deterrents to investing in the mining sector generally include its cyclicality and potential political interference (as seen in Peru), but these are not issues in Chile.
Instead, Nesbit is concerned by the sector’s prospective long-term growth, which is partly dependent on whether China experiences a soft or hand landing.
“I don’t think copper offers the potential we want. We would only buy it when it was out of favour and very cheap. The risk to commodity prices remains and it is likely China will slow down more than is expected – we are not great believers in global growth,” Nesbit explains.
Yet there is a positive knock-on effect of the copper mining industry to Chile’s investment landscape. The government has banked $21.8bn in assets generated from copper revenues in its Social and Economic Stabilization Fund, enabling it to “sail through when times are tough”, Nesbit notes.
Chile emerged relatively unscathed from the 2008 financial crisis, which by contrast hit Mexico hard. Sensible economic governance has brought stability to the Chilean economy and, as a result, its companies and workforce.
Nesbit says Chile’s “Achilles heel” is its vulnerability to energy costs. As it has very few hydrocarbons, the only way the country can generate power is via hydroelectric plants. However, it is “struggling to find new damns. When there is a shortage of rain water or snowmelt, it must resort to oil imports. The economy is vulnerable to drought and as the population grows, this problem will intensify,” Nesbit warns.