LatAm report 4: Consumers are key to investing in Chile
The spotlight is on Chile in the latest of InvestmentEurope’s LatAm series. Alan Nesbit, Latin America specialist at First State Investments, explains why consumer growth is more important to investing in Chile than its booming copper mines.
Chile is not top of the list for many managers interested in the Latin American growth story. Compared to its neighbours, it is a small country with an undersized stock market. Its GDP was a meagre $212.74bn in 2010, dwarfed by Brazil’s $2.1trn, Mexico’s $1.3trn and even Argentina’s $370bn.
The majority of Latin America-focused managers therefore tend to focus on Brazil and Mexico, which make up roughly 85% of Latin American indices, says Alan Nesbit, deputy head of global emerging market equities at First State Investments and fund manager on the First State Latin America Fund.
Nesbit (pictured) believes First State’s Latin American fund is unlike any other as a third of its 30 holdings are in Chile. Keeping the fund’s assets under management (AUM) low was crucial to gaining this exposure.
“We deliberately decided not to make the fund very big. If you have billions under management you are limited to investing in Brazil and Mexico,” Nesbit explains.
Nesbit’s team has consequently imposed an AUM limit of $200m on the fund to enable it to invest in less discovered markets such as Chile.
Nesbit’s interest in Chile is not historical. Traditionally it was considered the most expensive market in Latin America due to its reputation for safety. “It was governed by very clever, conservative people and its economy was run well, similar to how things are done in Asia. It was a very sensible place whereas the rest of Latin America was chaotic,” Nesbit notes.
The perception of the Chilean market as one boasting quality meant valuations were high. It also lacked liquidity as its pension funds, often major company shareholders, dominated the stock market which in turn limited stock-picking opportunities. This pushed up the prices of the few available stocks.
The Chilean economy has indeed seen more stability than most of the continent. Its interest rates have averaged 5% for the past two decades, whereas Brazil’s has averaged near to 18% and Mexico’s 7%. Its inflation rate has crept down from highs of 20% in the early 1990s to roughly 4% today.
In the past decade the surge in Brazilian growth has transformed Nesbit’s view of Chile. “Because Brazil got so popular, Chile got left behind,” he notes.
Consumer goods companies frequently “offer more value than their equivalents in Brazil and Mexico,” Nesbit says. This is because firms such as Compania Cervecerias Unidas (CCU), a popular Chilean beverage company famous for its beer, or Embotelladora Andina, a Coca-Cola bottler, face few competitors.
Unique to Chilean culture, such companies are often backed by large families with good reputations, Nesbit adds. “You feel they have a solid track record and have confidence in them,” he says, adding that Chileans are “honourable people – it is a safe place to bet on debt”.
Changes to pension fund regulation have helped liberalise the Chilean market, another incentive to invest there. “Rules for pension funds were very tight, setting limits on what they can own. Over the years regulation has loosened and the pension funds can now invest overseas,” says Nesbit.
Chilean pension funds can now invest 60% of assets in international securities and the government is in the process of raising the limit to 80%. Liquidity has been reintroduced to the domestic market as the pension funds’ interest in it begins to wane.