12th April 2013
Mark Mobius, executive chairman of the Templeton Emerging Markets Group has given Chile a glowing assessment for its stable and investor-friendly economic framework.
One of the key factors has been the creation of private pensions. In a note issued today (12/04/13) Mobius writes: “Since the 1980s, Chile has been characterised by a stable and investor-friendly economic framework, regardless of the political party in power. Around that time, the country introduced an individual capital accounts pension system managed by private companies, a system that, as of 31 January 2013, had close to US$170 billion in assets or more than 60% of GDP. In addition, a fiscal rule requires that proceeds from above-potential GDP growth and above-average copper prices are put away in sovereign wealth funds, which held close to US$21 billion at the end of January 2013.”
Mobius notes that Chile joined the OECD in 2010 along with Mexico and it has trade agreements with the US, EU, China, Japan and India.
“It is interesting to note that over the past decade, exports to the US increased while those to Europe proportionally decreased. Even more notable is that, over the same period, China rose to take a greater share of Chile’s total exports (from 9% to 18%) while exports to Argentina dropped substantially (19% to 7%).”
He says that as the world’s largest producer of the metal, copper exports have increased substantially over the last decade, from 37% of total exports in 2003 to 54% at the end of 2012, mainly, though, as a result of higher copper prices. “Given consistently high copper prices, which we do not expect to correct significantly in the foreseeable future, copper will probably remain Chile’s main export product and continue to be a strong contributor to the country’s GDP.”
“Chile maintains leadership positions in several areas besides copper, including the production of pulp, salmon and specialty chemicals. Many Chilean companies have used their strong domestic position to expand regionally, for example, in industries such as retailing, beverages, IT services and pharmaceuticals”, he adds.
He adds that from an investor’s perspective, companies listed on the Chilean stock exchange have to pay an annual dividend of at least 30% of net income. “We have continued to find what we believe are interesting investments in Chile. For example, during our most recent visit to Santiago de Chile, we met with the management of a beverage maker that had operations in Chile as well as in other countries in the region. The company reported strong profitability, but it had also managed to maintain a very conservative financial profile. Over the last few years, the company had consistently paid a high dividend while simultaneously expanding its business. All these factors were signs, in our view, of a fundamentally solid business.”
There are some downsides as well.
“One of the main difficulties Chile has had to wrestle with is low energy resources. With very little oil and gas exploration and production capacity, the country has had to import nearly all of its fuel, mainly in the form of crude oil, diesel and liquefied natural gas. Another risk the country faces is natural disasters, particularly related to seismic activity. Chile has experienced some of the strongest earthquakes in recorded history: Valdivia (in 1960, measured 9.5 on the Richter scale), Algarrobo (1985, 8.0) and Concepcion (2010, 8.8).
2These risks, however, do not dampen our positive view of the investment climate in Chile overall. The country’s fundamental and fiscal strengths have meant that it has the highest sovereign rating in the region (Aa3 by Moody’s and A+ from S&P’s) and is a net creditor. Given its economic stability and investor-friendly climate, we intend to continue to explore opportunities in Chile.”