Principal Turns Against Chilean Stocks Amid Slumping Investment

Apr 24, 2014 12:03 am ET

April 23 (Bloomberg) -- Chilean stocks are still expensive even after their 10 percent decline in the past year, said Valentin Carril, the chief Latin American economist and strategist at Principal Global Investors, the $292 billion asset-management arm of Principal Financial Group Inc.

Principal shifted to an underweight position in Chile from overweight this year, he said in an interview at Principal’s offices in Santiago. The change followed a report showing fixed capital formation -- acquisitions of property, plants, and equipment -- declined 12 percent in the fourth quarter from a year earlier.

High energy costs and falling investment are weighing on Chilean stocks, as well as speculation that company earnings may suffer as President Michelle Bachelet presses an agenda that includes increasing corporate taxes, he said. Carril favors Colombian, Mexican and Peruvian stocks over those from Chile or Brazil.

“Chilean stocks are still at high multiples compared to Latin American countries,” Carril said. “We are a small country with too much savings. The secular trend has been for multiples to fall.”

Chile’s benchmark IPSA gauge is the fifth-worst performing equity index in the world over the past 12 months. Peru’s is the worst after sinking 17 percent.

Bachelet plans to increase taxes by 3 percentage points of gross domestic product to fund spending on education and health.

Spending to generate human capital “makes sense,” Carril said. “I hope it works. But it’s a bet.”

Favoring Colombia

Bachelet has also vowed to lower energy costs by overseeing the construction of new power plants. Peru, where electricity costs less, competes with Chile for mining investment.

Principal’s favorite country in the region is Colombia, where the economy has been accelerating since the middle of last year. Industrial output, retail sales and unemployment data published over the past month by the Colombian statistics agency all beat expectations. Growth in Colombia’s gross domestic product slowed to 2.6 percent in the first quarter of last year and has since accelerated to 4.9 percent.

Proposed changes in Mexico to revamp the country’s energy and telecommunications industries could add as much as 1.5 percentage points to economic growth, Carril said. That possibility hasn’t been priced into stocks “at all,” he said.

“It’s like an option,” Carril said.