By the standards of many emerging markets
, the iShares MSCI Chile Investable Market Index Fund (NYSE:
) was a laggard in 2012, returning "just" 8.23 percent. That means
ECH trailed the iShares MSCI Emerging Markets Index Fund by 520
Chile wears the crown as the world's largest copper-producing
nation, a gift and a curse depending on the global economic
environment. The copper crown intimately links Chile to China, the
world's largest copper consumer. Perception becomes reality and the
reality for investors morphs into the belief that Chile's economy
and its equity markets need China to be firing on all cylinders to
make the South American country an attractive investment
That scenario leads Chile to being
lumped in with South America's higher-risk,
materials-intensive emerging economies
. However, the real reality is that the Chile/China link, while not
breaking, may be showing signs of decoupling and that might not be
a bad thing for ECH because the ETF and the Chilean can stand their
own two feet.
Surprising Correlations Given the copper conundrum, some
investors might expect ECH to move in lockstep with comparable
China ETFs. That ignores the fact that the materials sector
accounts for less than 15 percent of ECH's weight and that the
sector is just one of five that receives a double-digit allocation
within the ETF.
In fact, when measuring ECH
against a trio of major China ETFs
in 2012, one of two things become clear. Either it China is not
moving Chile the way some think it does or it takes a while for ECH
to catchup to China ETFs. Either way, the iShares FTSE China 25
Index Fund (NYSE:
), the iShares MSCI China Index Fund (NYSE:
) and the SPDR S&P China (NYSE:
) all sharply outperformed ECH last year.
Curiously, the correlations are not as intense as some may
think. Using GXC as the barometer because it is home to almost 200
more stocks than FXI, providing a broader view of the Chinese
economy, it is easy to see this ETF is not intimately correlated to
ECH. Over the past year, the correlation between the two is 0.62,
down from 0.79 over three years,
growth of 5.5 percent last year
, a solid number considering China's commodities demand was
questioned for much of the year. Importantly, Chile sported a $1.5
billion trade surplus for December, which was prompted by increased
copper demand, Reuters reported.
Domestic demand has been improving, helping the Chilean economy
prove somewhat resilient, and the country has the advantage of
a $15 billion sovereign wealth fund
At the domestic level, there is at least one primary risk to
Chile's internal consumption ambitions. Since the government does
not provide its employees with the types of grandiose pensions that
are so common in the U.S. and Western Europe,
Chileans are savers
. The country has a mandatory savings plan in place for state
workers, leading to one of the highest savings rates in the
However, those additional deposits are good for Chilean banks.
ECH devotes 18.4 percent of its weight to financial services name
and in Chile that is not a bad thing as the country is home to
arguably Latin America's most advanced, regulated, sophisticated
and transparent banking sector.
Another potential sticking point for some is ECH's premium
valuation. The MSCI Chile Investable Market Index
trades with a forward P/E of 16.2
making it the second most expensive South American Index behind the
MSCI Colombia Index.
Brazil, the region's largest economy, but the true ETF laggard
as measured by the iShares MSCI Brazil Index Fund (NYSE:
), trades with a forward P/E of just 10.5 on the index tracked by
EWZ. Inexpensive equities have lured some to EWZ in recent weeks,
but even a 7.14 percent increase in the past month for that ETF
trails ECH by 90 basis points.
For more on Chile, click
(c) 2013 Benzinga.com. Benzinga does not provide investment advice.
All rights reserved.
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