Chile's bourse has rallied sharply this year, but the market is ahead of itself in pricing in an economic recovery and further gains are seen limited and hostage to a rebound in commodity prices proving sustainable.
Commodity, retail and construction shares, which were among the most heavily punished as the global financial crisis mushroomed, helped drive the bourse to its highest levels since December 2007 last week, amid some signs of global economic recovery.
But the bourse posted its biggest one-day fall year-to-date on Wednesday in what traders said was an overdue correction after sharp gains, and with the crisis still choking demand and Chile's economy seen shrinking for the first year in a decade, the market is seen ending 2009 around current levels. The blue chip leading share index is up around 31 percent so far this year after falling 22 percent in 2008.
"The truth is, given the current levels of the IPSA, we think there's a pretty limited upside for this year," said Diego Celedon, deputy director of research at the Banchile brokerage. The IPSA rose around 16 percent in May alone, when it posted its biggest gain in a single month since January 1994.
In May, mutual funds made their biggest monthly investment in local shares since mid-2005 and pension funds sold short-term government debt to buy corporate bonds and shares as the central bank led the charge in Latin America to cut benchmark interest rates and spreads to US treasuries fell.
Chile's central bank this week cut its target overnight lending rate for a sixth month running to a record low of 0.75 percent, and has now slashed the rate by 750 basis points since the beginning of the year to combat the slowdown. Traders say some investors have been selling safe-haven dollars for pesos to invest in shares given increased appetite for risk amid signs the global crisis is bottoming out. "We are seeing what appears to be the beginning of a correction for the local bourse," said Jorge Selaive, head of research with the BCI brokerage. "The speed with which the market has risen is not sustainable."
By comparison, Brazil's Bovespa has risen around 36 percent year-to-date, while Mexico's IPC has risen around 9 percent.
Argentina's Merval is up around 40 percent year-to-date, while Peru's index has surged around 86 percent year-to-date spurred by commodity gains, following a 60 percent fall last year. Wall Street's Dow Jones Industrial average is down around 2.5 percent, after falling 33.8 percent in 2008.
ELECTRICAL UTILITIES SEEN GAINING:
Analysts expect Chile's electrical utility shares to continue to advance in coming months, particularly electricity generator Endesa Chile, a unit of the regional investment arm of Spain's Endesa, which is up around 14 percent year-to-date, and power generator AES Gener, majority-owned by US power company AES.
Some also see further upside potential for stocks like Soquimich, Chile's leading exporter of fertiliser and one of the world's biggest producers of iodine and lithium, and steelmaker CAP, two of the most heavily traded shares in recent weeks.
However, the BCI brokerage recommends unwinding positions in sectors such as retail and commodity-related shares. Like its Latin American peers, Chile's economy has slowed sharply in recent months as the global crisis hit demand for commodity exports and choked internal demand. The Chilean economy contracted 2.1 percent in the first quarter from a year earlier and analysts expect it to shrink 3 percent in the second quarter, putting the country formally in recession.
Chile's government on Monday slashed its 2009 outlook for gross domestic product, to a range between contraction of 0.75 percent and growth of 0.25 percent, from a previous forecast for growth of 2.0 to 3.0 percent, in line with central bank forecasts.
"The macroeconomic environment is bad, but should get better in the second half of the year, and we're already there," said Cesar Perez-Novoa, chief executive of the Celfin Capital brokerage. "The trouble is that much of those expectations have already been factored in to share prices," he added, "Given the current macroeconomic environment, there is a mismatch between share valuations and the economic realities."
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