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Chile 2021-2 Market Outlook

 Chilean Market Outlook for 2021-2


  • Fundamental and Technical analysis for the Chilean stock exchange.
  • Political finances, inflation are the major threats to the system.
  • The technicals are showing weakness to maintain a sustainable trend.


2021 is a major year for Chile since during this one, we will elect a new president, governors, we are still suffering the side effects of the COVID-19 (quarantines and curfews), and even we will start the writing of a new constitution. Despite the secular regime change, the local markets reflect this volatility, and a new narrative is being built along the way. Therefore, in this article, I will transmit what potential risks and technical setups are appropriate to analyze to see the forest and not get lost in the threes for the rest of the current year (2021).

Please be aware that some visuals will have annotations in Spanish. This is because my potential readers are from Chile (we speak primarily Spanish). You can find the original threat on Twitter at the following link.

Fundamental analysis

In the last few weeks, financial conditions have deteriorated dramatically. The decoupling of the stock market and higher local government bond rates concerning the international economy point to idiosyncratic factors, such as recent political tensions. This idiosyncratic risk can be viewed as the whole country's risk, also known as Systemic Risk.

At the left-hand side of the visual, you will find the evolution of the yield of the 10-year Chilean bonds (red) versus the United States 10-year yield treasury note (purple). On the right-hand side of the visual, you will find the main Chilean stock index (IPSA, in red) versus the rest of the world (ACWI, in purple). Both show the cumulative returns since a year ago.

Source: Chilean Central Bank and Bloomberg.

This particular situation proposes that the systemic risk has already begun to be incorporated into the price of bonds (remember that bigger rates imply smaller bond prices, they have an inverse relationship) and the stocks (returns around the 0% band). It will be necessary to observe the evolution of political tensions in the country to conclude that we are in a new secular era.

Along with the potential within the systemic risk, the COVID-19 era has started a new paradigm of money printing from the Central bankers. This new paradigm comes along with an increase in inflation.

Source: Own Elaboration with data from the web database from the Chilean Central Bank

As you can see, the real rates in Chile are already in negative territory (Real rates = Nominal rates - Inflation). This could imply a continuation of the inflationary trend, which leads us to raise even more the nominal rates of government bonds.

Despite the potential risk from politics and inflation, the Chilean Central Banks projected a growth GDP variation for the rest of 2021 is around 8.5% to 9.5% (a 2.5% bigger since march). The major factors that boosted this recovery are the direct payments from the current government (a.k.a Universal emergency family income) and the withdrawals of 10% from the AFPs (this is our pension system, similar to the 401k plans in the USA).

The left-hand side of the visual shows the growth variations from 2021 until 2023. As you can see, the fiscal stimulus and the 10% withdrawals let space for the pent-up demand effect during the current year. The growth tends to diminish for the consequent years due to a lack of monetary stimulus for consumption and investments (own assumption). On the right-hand side, you will find the decomposition for the projected growth for this year. The main factors are fiscal stimulus, an adaptation of the economy to the COVID situation, and the 10% withdrawals from the AFPs. The numbers are the percentual points of the current GDP variation (2.5% bigger since March 2021).

Source: Chilean Central Bank

If these projections are materialized, stocks and bonds may have a margin to reverse the current trend.

The Chilean Central Banks has prepared several scenarios and their financial implications if they materialize alongside the potential risks. 

On the POSITIVE scenario, you will find: 
  • Possible reasons
    • Bigger consumption disposition for householders.
    • Expansion of fiscal measures or continuation of direct payments.
    • Persistent effects of supply inflation costs.
  • Implications
    • Acceleration of the private sector.
    • Inflations expectations will tend to grow more accelerated than usual.
On the NEGATIVE scenario you will find: 
  • Possible reasons
    • Slower re-opening due to less favorable evolution of the pandemic.
    • Local uncertainty
    • Diminution of Foreign private investment.
  • Implications
    • Deterioration of the expectations of economic agents.
    • Later recovery in consumption and employment.
    • Negative effects on inflationary pressures (stagflation or Hyperinflation).
  • Fiscal or public finances (non-sustainable level of debt).
  • Inflation (above the target imposed by the central bank).
  •  Deterioration of external financial conditions.
Source: Chilean Central Bank

In a nutshell, the deterioration of public finances and inflation are the factors that could affect the Chilean economy. Therefore, there is a possibility to apply non-traditional measures or changes in the mandate of the Chilean Central Bank for the foreseeable future.

Although inflation is a latent risk, deflation could be a hidden factor. Even when rates are negative, the money appears to be trapped in local financial markets and not invested in the real economy (speed of money is in free fall).

The following visual explain the description from above.
Source: Web database of the Chilean Central Bank

M2 (in red) has grown with a more pronounced trend than the M1 (in blue), and the Velocity of money (green bars) is in "free fall" due to the lack of stimulus. This relationship gave clues that money (or currency) is trapped in the financial system and not in the real economy. The side effects affect consumption, loans given by the banks, and diminish the private investment (foreign or local).

More related to this topic in future articles.

Technical Analysis

I will conduct a non-traditional technical analysis using Elliott waves for the IPSA (major stock index in Chile).

Long term analysis

After completing 5 impulsive waves through mid-2018, the IPSA reversed the trend under a correction in the form of an ABC expanded flat (3-3-5), culminating in the bottom of the selloff during COVID19.

Source: Own Elaboration on TradingView

Medium-term analysis

The IPSA had a correction against the trend as an ABC correction in 3-3-5. Faced with inflation expectations and the national referendum results, the IPSA may have summarized its main downward trend. Higher prices should be expected for the stock index if it sustains above 3815 points (0.782 Fibonacci support). A new secular trend is confirmed if the 4625 (0.618 Fibonacci resistance) points are surpassed with conviction.

Source: Own Elaboration on TradingView

Short term analysis

The decomposition of the most recent correction in ABC is possibly experiencing its wave B. The zone in yellow reflects the target price of the current series of impulses (Fibonacci retracement 0.382 - 0.618). Possibly this correction is a bull trap for the IPSA.

Source: Own Elaboration on TradingView

Technical risks

I propose that it is a bull trap, given that the IPSA faces an imminent death cross (The 50 days moving average is crossing from above the 200 days moving average), decreasing highs on the MACD and rising lows on the average the RSI. These flags give us divergences that may result in a selloff of these bull traps.

Source: Own Elaboration on TradingView


If the systemic risks materialize and the IPSA closes below 3815, possibly the local stocks and bonds will suffer some heavy losses, leading us to a secular deflation scenario. In any other case, the economic recovery proposed by the Chilean Central Bank would be the winning card.


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