Chile's Election Results: Positive Catalyst for Short-Term Outlook and Investment Opportunities

Dear Client,

On May 7th, Chile held elections for constituent councilors, the elected body in charge of writing the new constitution. The election produced a significant victory for the opposition parties to the government, which are associated with pro-market policies and the defense of the current institutionality. This result may act as a positive catalyst for the country, especially considering the current political noise in the region. In response, local assets have experienced a rally, partly internalizing these results.

The election of the Council is a critical step in the process of drafting a new constitution in Chile, following the rejection of the previous draft in September 2022. The Constitutional Council, consisting of 51 people elected by direct popular vote under universal and compulsory suffrage, is responsible for developing a new constitution. The election results showed the right party (Republicans) with 23 seats, the center right (Chile Seguro) with 11 seats, the left (Unidad para Chile) with 16 seats, and one seat going to the indigenous peoples. The sum of the right and center right parties reach 3/5 to pass indications. It is noteworthy that when adding the votes of the opposition parties, they reach 62.0%, which coincides with the vote obtained in the Rejection of the previous proposal, maintaining the same political axis.

The Constitutional process began with a council of 24 experts with extensive professional experience who drafted a first proposal based on 12 widely supported constitutional principles, turning it into a more moderate proposal similar in many issues to the current Constitution. From now on, the Constitutional Council will discuss and approve a text proposal for a new constitution, requiring 3/5 of the council to approve constitutional norms to the final draft, whose text as a whole must be approved with the same quorum. The constitutional council will be installed on May 21, 2023, and must deliver the approved draft constitution by October 21, 2023, followed by a mandatory plebiscite on November 26.

Although it is still too early to fully assess the medium-term impact of these election results, we consider them to be a positive catalyst in the short term. Besides, the peaceful conduct of the elections and the swift recognition of the results by all political forces are encouraging factors. Furthermore, both the government and Republicans have expressed their support for the process and demonstrated a willingness to reach agreements. The victory of the opposition also compels the government to adopt a more moderate stance regarding the reform agenda it seeks to pursue. However, there is a potential risk scenario in which both coalitions exhibit irreconcilable positions, jeopardizing the process, particularly considering that the historic center-left party did not secure any seats.

The market has responded optimistically to the election results. On the day of the elections, the stock market is opening with a 1.8% increase, while the Chilean peso appreciated by 0.60%, and local interest rates remained unchanged. It is worth noting that these developments coincided with the publication of inflation records and the trade balance.

Regarding our funds positioning, within Latin American Debt funds, we have recently reduced our underweight position in Chile due to improved macroeconomic prospects and more moderate political signals. We have focused our investments on companies undergoing transformation that still offer attractive spreads. For example, we have invested in Aes Andes and Latam Airlines, which is experiencing a ramp-up of operations after restructuring its balance sheet through Chapter 11. Additionally, we have overweighted certain credit histories that are appealing due to the underlying asset value supporting the bonds, such as CMPC, Enjoy, and ILC.

In our Latin American Equity fund, we are overweight in Chilean equities. We believe that despite the decline in perceived risk reflected in lower interest rates, the stock market has not experienced a commensurate adjustment. Specifically, we find the utilities and banking sectors, along with basic consumption, to have favorable valuations and positive momentum in terms of results. We also currently see Chile as one of the countries in the region with relatively lower political risk, which provides a potential catalyst for valuations to normalize or at least reduce historical discounts.

Kind regards,

LarrainVial Asset Management Team