Rodrigo Echagaray: Good morning, everyone. My name is Rodrigo Echagaray. I’m the Head of Equity Research for Latin America, and I’d like to welcome everyone to today’s call where we’re going to discuss in depth everything there is needed to be known about Chile and the current environment as we head to presidential elections at the end of the year.
This is the first of hopefully many multi-asset publications, and so this is our launch of the initiative where we hopefully bring to everyone a different perspective on different topics through the lens of different asset classes.
Today we have Jorge Selaive, our Chief Economist in Chile. We also have Isidro Arrieta, our LatAm Credit Strategist, and we also have with us Hugo Ste-Marie, who is our Global Equity Strategist. We will hear first from Jorge on the macro setup and the political landscape. We’ll then hear from Isidro on the credit side, and then we’ll finalize with Hugo on the equity side. Please note that in the portal you can submit your questions. We will be hosting a Q&A session after the presentation, so please add those questions to the system and the portal
With that, Jorge, over to you.
Jorge Selaive: Thank you, Rodrigo, for inviting me to this call. I like to start to give you the flavor of the Chilean economy during the last three to four quarters, and then I’ll go directly to the political situation.
The Chilean economy has been undergoing a clear recovery process since the last quarter of 2024. However, this recovery is highly heterogenous across sectors and has some drivers that are transitory. On the one hand, we see a gentle recovery in private consumption, which showed an acceleration at the margin, largely explained by shopping tourism. Public consumption was very significant in the first quarter due to high levels of budget execution, but we know it will slow down for the rest of the year because of the fiscal rule. Investment was relatively flat in the first quarter, explained – I have heard that – by a high deflector associated with the exchange rate, but strong capital imports and mining investment, which is in the process of materializing, ensure robust growth over the coming quarters. Exports have also shown sustained growth thanks to primary sectors; agriculture [being] one of the main drivers. On the supply side of the economy, we see commerce showing a recovery and also some sectors of the manufacturing industry. But we also see construction maintaining particularly weak dynamism. Services have shown fairly sustained, seasonally adjusted growth, explained precisely by the significant investment under way in the mining and energy sectors.
In this context, thanks to transitory and some more permanent factors, along with a good start of the year – the carry-over – it is quite reasonable to expect GDP expansion of around 2.5% this year. The good basis for comparison will also be of considerable help, so much that it shouldn’t be surprising to see 4% growth year-over-year in the second quarter, with monthly activity growing between 3.5% and 5% and during May and June. GDP growth above 2.5% has gained some momentum at the margin, although we must still expect impacts from the trade war, which could become more evident during the second half of the year.
One aspect that might cause some confusion in this scenario is the central bank reason for signaling cuts in the monetary policy rate – because I’m saying that the economy is going to have expansion of 2.5%. In particular, if the economy is growing around its potential, why then monetary policy should be cut when inflation is still about 3%? The reason is very simple and lies precisely in this heterogeneity, this heterogeneity of the recovery – the concentration of investment in mining and energy, but the absence of investment in other tradable sectors and particularly in the non-tradable sector – is leading to a particularly dramatic deterioration in the labor market. Chile is the Latin American country that has lagged furthest behind in its labor market recovery. The seasonally adjusted unemployment rate stood at 8.7% in the quarter ending in April, with a sustained increase since February and above what could be estimated as the non-accelerating inflation unemployment rate (the NAIRU). Consequently, this trend doesn’t appear to be incompatible with the favorable surprises observed in core inflation in recent months. Only 20k jobs have been created over the last year. The output at the margin widens when measured by the labor market, and consequently it seems necessary to provide additional monetary stimulus for the lagging sectors. The labor market has lagged behind the cycle for a prolonged period in a context of consecutive increases in the minimum wage, not seen since the 90s. These increases have been associated with lower demand for unskilled labor, indicating that the minimum wage might have increased more than the productivity of these workers. The increase in the minimum wage in May – close to 4% – came alongside the destruction of 90k jobs in April.
Remember, many companies usually anticipate minimum wage increases. We still have a 2% increase in the minimum wage pending next January. The labor market situation could continue to weaken amid low investment in non-tradable sectors and those tradable sectors other than mining. The “two Chiles” observed in the labour market seems to be coping well with the decline in the lower-skill formal employment and the destruction of informal employment.
About the fiscal situation, I would say that is very challenging. The expansion of government expenditures that is implicit in the last fiscal budget for 2026 to 2029 is close to zero. Therefore, the next administration has two alternatives. On the one hand, to modify the path of convergence of the structural fiscal deficit, given more room to government expenditure, or announce a major reform to public spending – we might call it reform for efficiency – with substantial spending cuts providing room for corporate tax cut and also allocating more spending to healthcare among other areas. I’m currently more inclined to the second alternative.
A few words about the financial variables. We expect the central bank to cut the monetary policy rate in July and proceed with additional cuts to reach the neutral level during the first quarter of next year. About the effects, we are very positive about the copper price and also about the external perception of Chile. So, we continue expecting to visit levels below 900 during the next few months for the CLP.
I’d like to conclude this macro section before briefly discussing the political landscape, mentioning the pension reform that was approved last December and now under implementation. The positive impact on political sentiment is evident and was recognized as a good example of the healthy democracy in Chile. It also seems clear that we will see a recovery in savings in the medium term, with a favorable impact on the capital market, but also take into account that the 3.5% increase in the mandatory contribution will be observed for 6 million contributors by August 26 – significantly more workers than those affected by the minimum wage. This increase is significant and could extend the weakness of the labor market.
The other aspect to monitor closely is the implementation of the denominated targeted funds, which could lead to adjustment in relative prices between different types of assets and will require special attention from the regulator and the central bank.
On the political situation, this Sunday, the left-wing parties’ primaries will be held with four candidates. Polls show that the Communist Party candidate could be as competitive as the moderate left-wing candidate. A victory for the Communist Party could open up more space for the centre right with Matthei and increase the likelihood of her victory in November, of course, but could give the Communist Party significant strength in the run-up to the partial election of Congress, which is also part of the November election. Remember, the entire lower house and half of the Senate are up for election. This would lead to greater political polarization. On the other hand, a victory for Tohá, the moderate left-wing candidate, would consolidate the moderate left-wing parties, but make Matthei’s job more difficult, and she would likely seek alliances with centrist parties in an attempt to capture moderate voters. For now, polls show Matthei is very competitive but less competitive than a month ago, as right-wing candidate Kast has managed to commit fewer unforced errors and capture a larger share of the right-wing voters. It seems reasonable for now to expect Matthei to become the next president. But that scenario requires more work, and has become somewhat less likely. One additional aspect to monitor of these primaries is the turnout. My talks with different political analysts is that 1 million voters would be a disaster for the government and progressive coalition; more than 2 million voters will be considered a good turn-out.
I’m just going to stop here so we can continue with the analysis of Hugo and Isidro.
Rodrigo: Thank you, Jorge. Lots to digest there. I appreciate the broad perspective. And now let’s go over to Isidro on the credit side.
Isidro Arrieta: Thank you very much, Jorge. Thank you very much, Rodrigo, for inviting me. And thank you very much, everyone, for being connected here today. For the ones that don’t know me, I am Isidro Arrieta. I am the LatAm Credit Strategist. I sit here in in New York, in the LatAm desk, and I cover a hard currency bonds.
So starting on with the fixed income side, what we have seen is Chile performing well in the first half of the year that has had relatively high volatility but that has shown an overall, I think, total return that was very solid for the LatAm dollar bonds. When we look at total return, when we look at spreads in the region, in LatAm, Chile has had a middle of the pack performance with better performance in LatAm shown to high yield credits as well as some triple B minus names.
I think what has happened in the region in the last few years is that the universe of solid-rated countries like Chile has been reduced. So, Chile is kind of like an odd name in the LatAm space due to its very, very solid ratings. And so, when you look at Chile and you compare it versus an IG universe and EM or even if you put it into perspective with the developed markets, really what we have seen in the first half of the year is an outperformance of Chile’s year-to-date.
In our view, what has happened is investors acknowledged a solid macroeconomic and institutional fundamental for Chile, a pragmatic monetary policy in the country. All of this has been quite supportive for Chile’s debt and it has helped ride out the market volatility this year. And I think it has limited the outside moves for bonds.
When we look at the dollar curves in LatAm, Chile has seen an outperformance of the shorter tenors; threes, fives have been the best part. It’s not a surprise for us there. If you look at other LatAm countries and if you look at what happened with Treasuries, that move is very much in line and obviously adjusted by the different magnitudes depending on the rating of the country. In the corporate space, I think it’s clear that corporates have underperformed the sovereign. In general,
what we see in the corporate space is that the first half has shown bonds also outperforming more on the three- to five-year tenors, similarly to what I was saying in the behavior of the LatAm curves, and what has driven those names to outperform in that part of the curve is we’ve seen improving credit stories. So those names are obviously showing better performance, and then when you look at what has lagged is obviously the longer-dated bonds in the corporate space, but particularly the ones that have tougher operating environments and with higher capex plans.
And I will leave it there for now. I’ll pass it on to Hugo, please. Thank you.
Hugo Ste-Marie: Thank you very much. On my end, I’ll talk about the Chilean equity market. We have an overweight recommendation on it. Just to provide some context, the Chilean equity market accounts – it’s a small market – it accounts for about 1%, even less than 1%, of the MSCI Emerging Market, and even smaller percentage of the overall MSCI Equity.
So being overweight, Chile from a portfolio positioning standpoint, I would say it’s very easy to achieve, and we see some positives, like the equity market has been a strong performer year-to-date; when you look at the IPSA and the MSCI Chile, both are up over 20% year-to-date. The good news is that we see further upside over time.
I will flag four key points that support our, I would say, bullish thesis on the market. Number one, we expect further monetary policy easing to the tune of about 75 basis points until year-end, which we suspect will support growth, economic growth, and probably valuation metrics as well. Recall that the benchmark rate in Chile was over 11% back in 2023. It’s down to 5% as we speak, and, as I just mentioned, our economists are seeing 75 basis points of additional cuts until the end of this year.
So again, from a P/E standpoint, this is the good news. Relative to other countries as well, in the region, Chile has much lower real interest rates, and that’s again a positive, in my opinion.
Factor number two, I would say, when you look at the commodity market, the copper market is extremely strong. I watched a few minutes ago, copper was trading at over $4.90 in the U.S. It’s over $10,000 a ton on the LME, and, as you know, copper accounts for ballpark-half of Chilean exports. So not only having strong and rising copper prices is positive for the economy, but it tends to lead over time to higher 12-month-forward earnings for the IPSA. So, when you do a relationship between copper prices and the forward EPS, you see that the copper prices tend to lead forward EPS by about 12 to 15 months. So, given where copper prices are today, that supports higher earnings down the road. That’s the first good news, I would say. Number two, when you have strong copper prices, the earnings growth spread between the IPSA and the MSCI Emerging tends to increase. What does that mean? When you look at rising copper prices, the spread, the earnings spread tends to widen in favor of Chile versus EM, and usually it tends to support outperformance.
Point number three, I would say take a look at valuation. Valuation is not demanding from an IPSA standpoint. The IPSA is trading at about 11x forward earnings. If you go back the last, I would say, 20 years or so, the current P/E ratio is trading at about 1 standard deviation below the long-run average. So that’s interesting. When you look at it on a relative basis, Chile, I would say, looks also cheap relative to the MSCI Emerging Market; the MSCI EM trades at probably 12, 12 1/2 as we speak.
So you have like a 10%-plus discount versus other emerging markets, here as well. The discount is like one standard deviation below its long-run average. So, Chile from a valuation standpoint looks great versus other emerging markets, but it also looks quite cheap versus the S&P 500. As we speak today, the S&P is trading at probably 22x forward earnings. I will repeat: the IPSA is trading at 11 times. So, again, IPSA versus U.S., we have a massive discount. Overall, I would say we believe valuation is appealing on an absolute basis, on a relative basis, and in a context of monetary policy easing. We clearly see room for some absolute P/E expansion and probably some narrowing of the discount versus, I would say, other markets as well.
Point number four: from a political standpoint, the pension reform is behind us, we have been talking about presidential candidates proposing, I would say, overall, a constructive agenda, so we think the political landscape is supportive of growth going forward. That should be supportive of equities, as well.
So, I think when we add all those up, Chile deserves probably an overweight recommendation in our work. So again, in our work we like Chile, believe it deserves an overweight recommendation, and we see, I would say, further upside potential in the next 12 to 18 months from now.
So, I’ll leave it there. Pass it over to Rodrigo for, I guess, the Q&A.
Rodrigo: Thanks, Hugo, and thanks for the reminder on that report. If anyone wants to take a look at it just, please reach out to your sales representative. There’s a lot of really good content and charts in there up. Just a reminder to please submit your questions through the portal. We do have a few questions starting to show, so feel free to put those there. I think these two questions are for you, Jorge.
How should we think about differences between Kast and Matthei? Are they really that different for policies, like fiscal, for example? And then question #2 is: Should we expect any more lagged effects of the electricity price hikes on growth and inflation from here?
Jorge: Well, the first question is a very good question about the difference between Matthei and Kast. I would say that the program that was partially released by Matthei is saying cut in the corporate taxes; Kast was saying more or less the same. A very aggressive cut in the corporate tax from the current 27% to 18% during the next 10 years. Kast hasn’t released the exact cut in the corporate taxes, but it’s in the same direction. So economically speaking, they are very aligned in terms of efficiency, public expenditure efficiency. So, probably we are going to have in both cases – Matthei or Kast as next president – we are going to have a reform intended to give more room for government expenditure, cutting public sick leave, public transportation expenditure. So, I wouldn’t say that there is much difference in the economic program. I would say that the differences are lying basically in moral and ethical issues.
About electricity, we have a new increase in electricity tariffs in July. The incidence of that is going to be 0.2% of July CPI, and the next movement in electricity tariffs will depend, of course, in particular on the CLP. If we continue observing an appreciation of the currency, I wouldn’t work under the assumption of new increases in electricity tariffs during 2026.
Rodrigo: Thanks, Jorge. And, overall, on to the equity side, there were a couple of questions on what are the catalysts? It seems that people are questioning where do we go from here? It’s been a good rally so far. Obviously, you mentioned copper, obviously, the political landscape seems to improve, but anything else? And maybe as a tie-in also to Jorge, any spillover from Argentina to Chile or to the region? So why don’t we start with you, Hugo? And then we’ll pass it on to Jorge on Argentina.
Hugo: Absolutely, that could be. I mean, we’ve seen clearly a political shift in Argentina; the economy seems to do a bit better, and we’ve started to see in the past couple of years more people from Argentina traveling to Chile, clearly to shop and all of that. So clearly that could add to economic activity, maybe, or they could probably flag that or have a bit more flavor. But from my seat, the key drivers will be the monetary policy. As I mentioned, I think it’s going to be supportive of economic activity. Multiples are low, so usually when you have easing and real rates are declining as they have been doing in the past year or two, that should be supportive of multiples.
We’re talking maybe as well, maybe a weaker USD as well; that should be supportive of copper prices and that should be supportive of international equities, including Chile, I think over time. So, I think you have a few levers that could probably support the equity market. As you were saying earlier, you’re absolutely right, this market in May was overbought; at some point the market was trading at 20%-plus above its 200-day moving average. Listen, we like to see a rising moving average, a market that is trading above its 200-day line, but when the gap with the 200-day line becomes too wide, eventually that suggests some overheating condition. Since then, we’ve seen a pull-back. I think it could be closer to a decent entry point, and I have been talking about the levers that we could see playing out over the coming months and quarters that should lead to further outperformance, in my opinion.
Rodrigo: Jorge, any thoughts on Argentina? Does that move the needle?
Jorge: Well, Hugo mentioned the tourist shopping. Yes, one-third of the dynamism of private consumption during the first quarter was explained by Argentinians coming to buy durable goods in Chile. Of course, that will not be significant in the next quarters, but it was very important, and that was one of the transitory positive impacts on consumption. So, I wouldn’t work under the assumption that that will continue during the next quarters. And Milei is an example for Kast. Kast has been mentioning Milei many times, in particular for giving conviction to the reform to the state. I mean, basically cut government expenditure, reducing subsidies – in particular the subsidy that is close to 1 billion a year in public transportation, probably Kast intended to tackle that subsidy along with the sick leave, the public sick leave. So, it’s a very good example for the region – and in particular for Chile – for reducing the size of the state.
And another positive impact is from level. There are many reforms that are basically for the investors in Argentina, and they are basically now receiving the benefits of a more open economy, more open and with less capital restrictions. So, I would say that that’s the main drivers. I wouldn’t say that the driver list is basically to increase export/imports. I would say that it’s basically an example for the region.
An example, in particular for Kast; Matthei hasn’t mentioned Kast as a benchmark, but Kast has mentioned Milei many times. Those are my thoughts.
Rodrigo: Yeah, I know. We definitely have seen some of that reflected in the results of some of the Chilean retailers. Isidro, this is one is for you.
Isidro: Rodrigo, first, before we change topics, I wanted to add just two seconds, but I think it’s also important on Argentina becoming a bit more rational. And as an Argentinian, I hope that has many more years and it lasts. The other big thing I think is for utilities having a more reliable partner on the imports of gas. So, if Argentina can be more reliable on the exports of gas to Chile, that’s also a good thing. I think for the utilities to have that source of fuel, is very good for the margin. So that’s also a positive for the sector.
Rodrigo: That’s a great point, and it’s an important sector obviously in Chile. So, definitely good to have that visibility.
Someone is asking about the corporate world, in the corporate bonds, and any comparisons or reflections that you can do at the sector level in your world.
Isidro: Yeah, sure. So, in the corporate space, we see improving credit stories. I think also, going along what the Jorge was saying on the utility sector, on the energy sector, we’re seeing there a better environment for companies – as being a bit tough in the last few years, but things are getting much better. I think obviously capex for certain names remains high, but I think in the medium term that will lead to better credit profiles and increasing a bit leverage, as a consequence. We also see a good risk–return balance. I think for mining names we mentioned the copper price, and I think that with some of the investments that are coming in the sector and the fact that in other regions of the world coming up with more supplies is shown very tough, it’s, I think, a good thing for the sector. Finally, I will mention the retail sector. We’ve seen a very nice recovery in some of the bonds on that sector. There is a bit more upside. It’s more limited, but I think at least we see a positive trend there. Limited, but still a positive trend there.
Rodrigo: Great. And Hugo, difficult to talk about copper and Chile without bringing China into the equation. To what degree should we be worried about China? Any thoughts on that?
Hugo: Yeah, it’s a question that comes up very often in meetings. I would say what is probably unexpected, at least from an investor standpoint, is to see China growing at a very slow pace, still having real estate issues that have been around for more than a couple of years now, and still you have copper prices that are hovering at around 5 bucks a pound and New York. So, China is decelerating. China is growing at a slow pace, is having issues, but copper is moving up, nonetheless. I think we have another webcast earlier this morning on the copper market with our own base metal analysts. The other great report – I think that was last week – the copper market is probably much tighter than investors believe. Inventories are lower. We have some mine issues, supply issues over time. You had a lack of investment in the past decade due to the bear market in base metals. I think all this put together, and now you have the green transition – even though the Trump administration is probably not pressing the pedal as much on the green transition – like that’s a theme that will continue to play out for several years, and that is supporting I think the copper market, explaining why copper trades at 5 bucks, while China is having a lot of issues. So, I would just keep that in mind. That explains why copper is there. Maybe it stays elevated or goes maybe a bit even higher over time. So, again, China is not, I think, the main driver anymore, and that’s what investors have to keep in mind, as we as we speak.
Rodrigo: Thanks, Hugo. And Jorge, back to you. A question on what’s your view of the monetary policy rate cut process, and if you see any impact from the situation in the Middle East?
Jorge: Well, I was expecting a cut in June’s meeting and probably those that read the communique realized that the Middle East situation was mentioned twice, and the pop-up occurred 72 hours before the monetary policy meeting and was not part of the baseline scenario of the monetary policy report. So, I expect now with the current situation in the Middle East, with the oil prices coming back to the previous levels that we have before the Middle East situation, we already have a negative incidence of gasoline prices in July CPI, along with increasing electricity tariffs. These two elements are part of the headline inflation, not the core inflation. So, my call is that the central bank will cut the rate 25 basis points in July. And the next cut should be in September. But of, course, that will depend on the CPI prints of inflation; I’m expecting a negative print in June and I’m not expecting the 0.6% or 0.7% the market is implicit in forwards in July, and then that would give room to the central bank to continue cutting in September. And finally, in December, my forecast of inflation for the year is 3.5%, below market, and it’s slightly below the central bank scenario. Very dovish in terms of inflation, but because I’m very hoggish for the CLP.
Rodrigo: I like it. There’s our out-of-consensus call. It’s always good to have one. Maybe staying with the central bank, there’s a question that reads: Do you think that, in the next administration, the central bank will start to consider the monetary policy implications of an ever-surprising, expansive fiscal policy?
Jorge: Well, the fiscal situation is part of the baseline scenario of the central bank – not the timing of the execution of the government expenditure, but expansion year over year is part of the baseline scenario of the central bank. So those are things that the central bank has a different scenario; the expansion that is implicit in the next monetary policy report is basically 2.3% year-over-year expansion in government expenditure this year, which is basically what is part of the budget law,
and considering the recent announcement of cuts in some expenditures. And that will continue, probably, [as the] baseline scenario, and now if there is an announcement of cuts or a change in the path of convergence in the fiscal deficit in March 2026, the central bank will incorporate that in the baseline scenario of the monetary policy report that will be released in March or the one that will be released in June, depending on the timing of the announcement. But I don’t see a change in the way the central bank is contracting the monetary policy report.
Rodrigo: And then last question for you, Jorge, and I think you you’ve touched on this in your earlier remarks. Which economies, economic sectors are showing the most dynamism and which are the worst performing?
Jorge: The lagging sector: construction definitely; and commerce is basically driven by this tourist shopping and it’s outperforming the other sectors. In the middle you have manufacturing industry and of course services related to the materialization of investment. Not financial services, but services related to the materialization of investment; they have been showing positive expansion, seasonally adjusted. And my call is that that will continue because we have an expansion in investment in the mining and energy sector that will continue. I have a difference between the baseline scenario of the central bank; they raised the forecasts of investment to 3.7% this year, 3.2% next year, and around 2% in 2027. If you are up these three expansions, you end up more or less with the same expansion I have in my baseline scenario, but my call is that we’re going to have an expansion of investment of 6% this year because my view is that there is too much investment in the mining sector, more or less in line with what Hugo mentioned about the situation in the copper market.
Rodrigo: Thank you for mentioning that. I should have mentioned that in the report, for those that care about the North American companies with a presence in Chile or investing in Chile, there is a list also of some of these Canadian-listed companies or mining companies that have assets down in the region.
Well, I don’t see any more questions in the queue. So, why don’t we leave it there? Thank you, Jorge. Thank you, Hugo. Thank you, Isidro, for your time. And thank you to all the clients to participated in the call today and looking forward to more conversations like these in the future. Thank you.
