Strategy Note /
Chile

Chile rejects new constitution, relief for investors and renewables (for now)

  • 62% of voters (with 85% turnout) reject new constitution: a much larger magnitude compared to pre-vote polling (46-48%)

  • Mandate for potentially market-unfriendly policies (higher taxes and government spending) not established

  • But underlying grievances over inequality, which drove mass protests in 2019 and Boric's election win, remain

Chile rejects new constitution, relief for investors and renewables (for now)
Hasnain Malik
Hasnain Malik

Strategy & Head of Equity Research

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Tellimer Research
5 September 2022
Published byTellimer Research

Chilean voters' rejection of the new constitution is not a surprise, but the magnitude of their rejection is.

Opinion polls ahead of the vote on 4 September had suggested a rejection with 46-48% vote share. The actual rejection was 62%, on a very high turnout of 85%.

Chile assets are cheap – at the close of 2 September, the local IPSA Index was up 27% ytd, LatAm's top performer, but trailing PB of 1.1x (for 18% ROE) was still at a 25% discount to the 5-year median and the upside to spot FX rate should REER return to its 10-year median is 10%.

But relief over the reduction in the risk of market-unfriendly reforms should be tempered by the fact that the grievances over inequality which drove mass protest in 2019 – despite a track record of better macroeconomic growth and policy than regional peers – remain.

Chile's share of global output of copper and lithium – two key inputs of the renewables transition – is c28% and 22%, respectively.

Implications of such a big rejection

Chilean voters' rejection of the new constitution, with a 62% majority and an 85% turnout, is not a surprise but the magnitude of their rejection is.

Opinion polls, conducted in mid-August by Cadem, DataInfluye, and Activa, suggested rejection was likely but with a 46-48% share and a margin of victory of merely 5-13pp (compared to the actual margin of 24pp).

The implications of the vote are as follows:

Copper and lithium

Copper and lithium output may face lower risk from adverse royalty and tax changes for foreign miners – Chile's approximate share of global output and reserves of copper are 28% and 23%, respectively, and the equivalent figures for lithium are 22% and 44%.

Chile is key for the renewable energy supply chain

Chile-specific

Leftist President Boric has not won the popular mandate for potentially market unfriendly policies, ie higher taxation and government spending.

Boric's ability to govern the lower house of Congress, where his own party has merely 6.5% of seats and his coalition has merely a minority of 43%, is even more precarious than before.

The underlying grievances around inequality and dissatisfaction with the political class, which caused mass protests in 2019 and led to the election of Boric in December 2021, remain. The misery index (unemployment plus inflation) averages 18% year to date, almost double the monthly average of 9.5% in 2019.

To address these via constitutional change, President Boric will have to amend the existing constitution. While the threshold required in Congress for these changes was recently reduced, from 60-67% to 57%, it remains well above the governing coalition's share of seats.

Chile President Boric lacks legislative control and the rejection of new constitution weakens this further

Chile inflation and unemployment both levels higher than those seen in 2019 when mass protests started

EM and LatAm equity strategy

From an EM portfolio perspective, global growth concerns may weigh on all EM commodity exporter equity markets, until the outlooks for US interest rates and Chinese lockdowns clear. But the copper exporters, Chile and Peru, are cheaper relative to historic average than most oil exporters.

Within a LatAm context, Chile, up 27% ytd (as of close 2 September), has outperformed regional peers (which range from down 20% in Colombia to up 21% in Brazil). With trailing PB at a 25% discount to the 5-year median, it remains much cheaper than Brazil, which is on a 5% premium. However, currency upside is greater in Brazil, with a 10% increase in Chile spot FX rate implied by a return of REER to the 10-year median, compared to a 20% increase in Brazil.

Chile trailing Price/Book at a 25% discount to 5-year median

Net Commodity Export exposure via EM equities relatively cheap in Chile and Peru (Copper), Kuwait, Oman, Qatar (Oil & Gas), Brazil (Iron, Food), South Africa (metals)

Related reading

Copper's fall should not put off a revisit of Chile and Peru equities, July 2022

Serbia stops Rio Tinto's Lithium mine, echo of Chile – renewables reality check, Jan 2022

Dividend protection in EM for hawks: Emerging-Frontier Equity Monthly, August 2022