Chile stocks seen outperforming global downturn

SANTIAGO (Reuters) - Chilean stocks are reeling from the storm in global markets, but are expected to weather the turmoil better than their Latin American peers thanks to a stable economy and a more developed capital market.

Year-to-date losses of nearly 20 percent on the blue-chip IPSA index .IPSA, and of nearly 17 percent on the all-market IGPA .IGPA look attractive compared with drops of about 40 percent on Brazil's Bovespa .BVSP and of 30 percent on Standard & Poor's industrial index .SPX.

Chile has underperformed regional markets in boom times and better absorbed the impact of downcycles, though local markets would be at risk from a world recession.

"This year has proven that Chile is a defensive market," said Cristina Acle, head of research with Corpbanca. "I think the real threat (to Chilean markets) is a global recession."

With a population of around 16 million, Chile's economy ranks number six behind regional powerhouse Brazil, but in terms of capital markets, it is the regional leader.

"Chile has always been known as sort of a safe haven. It's got the most developed, open and modern market in Latin America, and they continue to advance it with capital market reforms," said one analyst at a major international bank, who was underweight on Chile and did not want to be named.

"It's also been a highly conservative place, so maybe that's held back returns in the past. But when times are tough, Chile is supported."

Known for its fiscal prudence and long lauded as the most stable economy in Latin America, Chile has been socking away billions of dollars in windfall copper earnings in rainy-day sovereign wealth funds.

Although Chile's $126 billion economy is dependent on copper, raw material companies make up a much smaller portion of its stock index than other regional markets, which has made Chile's bourse a bit more resistant to commodity price falls.

NOT IMMUNE

Besides the U.S. financial turmoil and the outlook for global recession, Chile's economy is also grappling with inflation and lower prices for copper, Chile's main export, which accounts for over half the value of its exports.

September's 12-month inflation came in at 9.2 percent, three times the central bank's target rate of 3 percent and near 1994 highs, with further hikes seen in its benchmark rate -- now at 8.25 percent and the highest in 10 years.

Electric utilities as a sector have led the bourse so far this year, and analysts predict additional gains in coming years as prices rise amid relatively short supplies.

As of Friday, electric utilities were the only positive blue-chip sector, with a year-to-date gain of 10.4 percent.

"Scarce supplies of electricity are going to continue for a couple more years and high prices will continue for longer than that," said Corpbanca's Acle.

Endesa Spain regional electric utilities, Endesa Chile END.SN (EOC.N) and Enersis ENE.SN (ENI.N), which together account for about 20 percent of the blue-chip index capitalization, were up 19 percent and 2.5 percent respectively year-to-date after a sharp global sell-off on Monday.

The consumer sector, dominated by the beverage industry and down 6.1 percent as of Friday, is another area that has performed relatively well this year, with leading brewer CCU CCU.SN flat for the year and Coca-Cola bottler Andina AND_pb.SN down only 2.5 percent.

Major blue chips like steelmaker and iron ore miner CAP CAP.SN and Soquimich SQM_pb.SN (SQM.N), a leading exporter of potassium-based fertilizers and World No. 1 producer of lithium and iodine, had significantly outperformed the market before Monday's losses after sharp gains earlier in the year.

Chile's retail sector has been hard hit this year, down over 35 percent, despite the high profits, aggressive investment and international diversification of regional giants Cencosud CEN.SN and Falabella FAL.SN.

"We don't see a turn-around any time soon." said Agustin Alvarez of the BICE brokerage. "First we need to see a recovery in the U.S. real estate market. The cycle of falling prices has to stop."

(Editing by Simon Gardner)