Chile stocks seen outperforming global downturn

By Lisa Yulkowski - Analysis

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.