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Industry 'unequivocally positive' on Piñera's Chilean presidential comeback

Industry 'unequivocally positive' on Piñera's Chilean presidential comeback

Sebastián Piñera’s win in Chile’s presidential election has infused investors with new confidence in the country’s prospects, as they expect the right-wing president to revitalize the economy after four years of feeble growth.

In the run-off elections Sunday, Piñera clinched a win with 54.6% of the vote, while Alejandro Guillier, the left-wing opponent, captured 45.4%.

The election was widely seen as a referendum of current president Michelle Bachelet's progressive policies, which have been blamed for slowing down the growth of one of Latin America's richest countries.

Chilean index IPSA rose 6% on the news, signaling investors' enthusiasm for Piñera. The Chilean market had dropped more than 10% when the candidate won the first round elections by a narrower margin than expected. 

'[Piñera's win is] unequivocally positive for Chilean assets,' said Sean Newman, an emerging market debt portfolio manager at Invesco. 'His nine-point lead suggests he'll be able to pursue his mandate despite not having a clear majority in congress.'

Allan Schlesinger, senior vice president and fund selector at Chilean multi-family office Dorco Inversiones said: ‘Markets today have shown a general optimism that we will have a good near-term future,’ he said. ‘It’s important to note nothing that has happened because he hasn’t assumed the presidency, but I think expectations matter a lot.’

He added that the optimism will hopefully fuel more projects and dynamism in the economy.

'Now, we're pricing in a bit of euphoria and I think it will calm down in the long run. I think next year the market will be higher than today, but not going up to 5% every day.'

Against this backdrop, the strategy team at Chilean firm Bice Inversiones recommended its clients to reduce their allocation to local and international fixed income and bet on Chilean equities instead, the firm said in a note Monday. 

Citywire AA-rated Verena Wachnitz (pictured above), manager of the T Rowe Latin American Equity fund, said the win is also encouraging for the country's growth outlook.

'We should see a pick-up in confidence and investments and an acceleration of growth from the recent low [of about] 1.5% to something more like 3%, which is closer to the economy’s long-term potential,' Wachnitz said. 

Despite her positive stance on Chile's outlook, Wachnitz raised concerns over the lack of diverse sectors within Chilean equities. 

'Top down, with this election outcome, we believe Chile is one of the more attractive countries in the region,' Wachnitz said.

'But from the bottom up, it is less easy to find good ideas because there are a lot of utilities, materials and energy in the benchmark, which generally don’t fit our investment process. We will look for opportunities to add, although the market is having a nice rebound today.'

Pension pains

Although a potential windfall for investors, it's not clear whether Piñera's win will benefit local pension funds, which have been on the hot seat for more than a year amid complaints that the AFPs aren't delivering adequate pensions.

The fees pension funds pay to invest through asset managers have been a key tension point. Under the current scheme, savers pay these fees, but Bachelet's government has proposed to pass those costs to the AFPs instead.

Uncertainty about who will bear these costs have discouraged the AFPs from investing in assets such as alternatives, which promise higher returns but tend to carry higher fees.

'I would say there's at least an expectation that [Piñera] will tackle this in some way. I wouldn't dare say that the expectation is that it will be resolved completely or in the very short-term,' said an AFP portfolio manager who spoke on condition of anonymity.

Schlesinger, who was an AFP portfolio manager for a number of years, said it was important to resolve the rhetoric around costs and fees.

'Worrying only about costs and not about returns is harmful to savers. There are some active strategies, especially in emerging markets, that deliver higher returns. Making AFPs invest in cheaper passive strategies and making costs the center of the conversation is going to be harmful,' he said.

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Verena Wachnitz
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3/53 in Equity - Latin America (Performance over 3 years) Average Total Return: 24.65%
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