NEW YORK — The countdown for election day in Chile is on, and with expectations in high-gear voters and investors alike wonder what lies ahead for the South American nation. While Sunday’s race is increasingly looking like a match between two of the seven candidates, Morgan Stanley has something to say: Frontrunners are moderating their views and that will likely help to foster a recovery in the local markets.

“We believe investors have overly punished Chilean risky assets over the past two years, and the presidential election (1st round on November 21 and 2nd round likely on December 19) could be the catalyst for a turnaround,” a group of thirteen analysts wrote in 45-page report to investors.

Six presidential hopefuls participated Monday night in the last televised debate in what was described as a contentious exchange before the vote, by newspaper La Tercera. According to the most recent projections reported by Pauta, Chilean voters are narrowing their preferences between José Antonio Kast (Frente Social Cristiano) and Gabriel Boric (Apruebo Dignidad), who eventually will advance to a second round or ballotage on December 19. Yasna Provoste (DC – Nuevo Pacto Social), Sebastián Sichel (IND – Chile Podemos Más), Eduardo Artés (Unión Patriota), Marco Enríquez-Ominami (Partido Progresista) y Franco Parisi (Partido de la Gente) are also running.

“We are already witnessing the two leading candidates moderating their rhetoric to appeal to center and undecided voters in the likely 2nd round,” of the most consequential election of the past decades in Chile, analysts including Simon Waever, Guilherme F. Paiva and Juan P. Ayala said in the report dated November 12.

Along with the moderation on the rhetoric, Morgan Stanley points to a second favorable factor for the nation’s assets: public opinion polls point to a political polarization, “which should lead to a fragmented Congress and some necessary consensus-building to advance the next executive’s policy agenda.”

Chile’s fiscal and potential growth face downside risks in the coming years, the analysts said, but macro disruptive policy outcomes are increasingly unlikely. “We think the macro backdrop should remain challenging in the event of a victory by either of the current frontrunners, with fiscal policy the main risk in both cases given the widespread push for higher social spending and the candidates’ challenging-to-implement tax proposals,” they said in the report.

Overseas Interest

“We have started to notice incremental interest from foreign investors toward Chilean equities over the past 3 weeks,” the report said. Business confidence has also rebounded recently to 2019 pre-social unrest highs, supported by a sharp recovery of the local economic and corporate earnings. Missing in the picture, however, is the return of the consumer confidence, which still lags as political uncertainty remains.

The Morgan Stanley analysts also points to the depressed valuation levels for Chilean assets: since 2019, the year of massive protests seeking social and economic changes, the MSCI Chile index has lost almost 5% in USD absolute terms and has underperformed emerging markets by ~25%.

Chile’s equities are close to 10.5x forward earnings and with +695bps implied risk premium, while the Chilean peso stands with a 25% risk premium, the currency’s highest risk premia ahead of any election since 2009. At the same time, USD sovereign bonds are pricing in a two-notch rating downgrade, offering asymmetric payoffs, whereas copper, the country’s main export product, has rallied 60%.

If the outcome of the election favors a market friendly candidate the analysts recommend shares of Banco Santander, Falabella, Parauco, and Enel Chile, short USD/CLP and positions in Chile’s 10-year dollar-denominated bond. If the result is market unfriendly, shares of Copec and CMPC are favored as well as pay in 10-year local rates, according to the report.

Chile’s economy is rebounding after contracting 5.8% in 2020 and the International Monetary Fund is projecting the gross domestic product will grow 11% this year. The new government will take office March 2022.

Also relevant:
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* Bank of America Sees Chile’s Central Bank Raising Rate 75bps in December After Unexpected Hike to 2.75%
* Brazil, Chile Markets ‘Overweight’ For Morgan Stanley as MXLA Seen Rising 14% Mid-2022