The ETF ECH (iShares) offers a diversified exposure to the Chilean economy across many sectors and include 32 industrial, financial and services companies.
The interest of this ETF is that it is not only an exposure to commodities (only 13%) and it offers a real diversification. After a long period of adjustment the risk/return ratio looks attractive, while valuation multiples, at around 8x (per), seem very low in view of the growth potential of Chile's economy.
Chile's economy is dominated by the industrial sector and services. Both sectors contribute more than 96% of GDP (US $c.240 md in 2016). The main industries in Chile are mining (copper, coal and nitrate), manufactured products (agri-food processing, chemicals, wood) and agriculture (fisheries, vineyards, fruits). The three main challenges in Chile's economy are the exit from the traditional dependence of the economy on copper prices (copper production accounts for 50 per cent of the country's exports), the development of self-reliant food production (the current agricultural production covers less than half of the country's needs) and the increase in productivity, especially in the mining sector.
After years of steady growth, Chile faced a significant economic slowdown in 2015, due to the fall in copper prices, as the country is the world's largest copper exporter. As a result of lower demand In major emerging markets, growth was moderate in 2016 (1.8 per cent). However, the outlook for 2017-2020 is more supportive, with a projected growth rate of around 2% in 2017 and 3% in 2017, even though Compared to the years of the commodity boom, this remains more modest.
Chile invested heavily in renewable energy, which is expected to represent 20% of the country's energy production in 2020. ECH posted a performance of 17% in 2016, which partially wiped out the 2015 fall (-20%), in the wake of the fall in commodities prices, while since the beginning of the year 2017, ECH rose by almost 18%. The Chilean index performance is mostly correlated with that of copper, which also gained 15% in 2016 after a sharp fall in 2015 (-23%), but it looks of a different nature in 2017, as copper only increases by 2% YTD. The reduction of copper capacity, the potential US investment programme in infrastructure as well as the likely end of recession in Brazil (despite repeated scandals) bodes well for the coming months.
In addition, Chile is stepping up economic partnerships, including China and Canada, and is a reference country in South America for its political stability. The relative weakness of the US dollar and a rather dovish Fed, also constitute a driver of Chile's interests.
ECH expenses are 0.62%, higher than the average of our ETF library, but in consistency with most other emerging markets. Assets Under Management are 460 M$.
We selected ECH on 20/05/16 in Dollar Active Portfolio. ECH has grown by 24% since that date.
