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Goldman and BBVA warn of Chile rally after primaries

(Bloomberg) – Chilean assets started the week on the rise after an electoral primary knocked out the Communist Party candidate for the November presidential election.

Stocks posted their biggest two-day gain in nearly four months, local bond yields fell and foreign notes outperformed their peers as euphoria washed over investors.

But now, a trio of Wall Street banks say the rally may have gone too far, warning that a lot of political risk remains.

Goldman Sachs Group Inc., RBC Capital and Banco Bilbao Vizcaya Argentaria are advising investors to stay on the sidelines while Chile elects a new president amid a simultaneous rewriting of the Constitution. They say the country, long considered the most reliable borrower in Latin America, is heading into a new era of higher deficits and moving away from policies that prioritized business and the economy.

Warning notes can be a wake-up call for operators. While the outcome of the primaries likely averts a worst-case scenario for investors in the November elections, analysts say Chile’s politics remains tumultuous and pressure is mounting for the next Administration to increase social and economic programs. loans.

“The results are bittersweet,” said Daniel Rico, currency strategist at RBC in New York. “The new Constitution of Chile will, by definition, be more inclusive and will require a broader government role, that is, greater spending.”

Former student leader Gabriel Boric won the vote of the left-wing parties with 60% support, which surprised the experts who had given the advantage to the candidate of the Communist Party, Daniel Jadue. On the right, the former Minister of Government Sebastián Sichel, who has asked to maintain the economic pillars favorable to the country’s market, won his primaries with 49% of the votes.

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In the two days after the vote, the major equity index rose more than 3%, while local and international bonds rose. That gave a welcome respite to instruments that this year had been among the worst performing in emerging markets after a period of street protests sparked by inequality and the lack of a social safety net.

Chile’s government is also testing investors’ appetite after the primaries: on Wednesday it sold 1.75 billion euros ($ 2 billion) in five- and 15-year social bonds.

There have been no polls since the primaries and it is unclear who has the upper hand. Pilar Tavella, an analyst at Barclays Plc, said Boric may have a better chance than Jadue of winning the November presidential election, increasing the odds that a leftist president will be elected.

At the center of investor fears is the idea that, whoever wins, Chile will leave behind the framework that made it a darling of neoliberal economists in previous decades due to its low deficits, robust growth, and strong business protections; and that it will adopt policies aimed at helping the poor and reducing inequality.

Boric, a 35-year-old MP, is seen as less extreme than Jadue, but he’s not exactly a market favorite.

“Gabriel Boric’s policy platform still implies a very significant increase in the tax burden, the elimination of pension funds managed by the private sector and a great expansion of the role of the state in the economy,” Alberto Ramos wrote in a report. , an economist at Goldman Sachs in New York.

Sichel, 43, was director of the economic development agency Corfo and later headed the Ministry of Social Development, where he helped establish an emergency cash transfer program for poor families. He was also president of the state bank BancoEstado.

Chile’s economic model can be improved from within and does not need radical reform, Sichel said in an interview last month. He has called for boosting cash transfers and improving public services.

Regardless of who wins the presidency, “there will be continued pressure for additional social spending,” said Richard Francis, senior director of sovereign debt at Fitch Ratings.

The rewriting of the constitution, which began in July and will take up to 12 months to complete, may have more long-term implications for Chile’s institutional framework and overall economic policies than the elections, Fitch said.

A key factor for the local market will be what happens to Chile’s private pension funds, known as AFPs, according to Jaime Achondo, CEO of brokerage Fynsa. Boric had previously shown support to end them, but in recent debates he has said he wants to create a separate public system by keeping the AFPs as a voluntary option. Sichel has said that he wants to keep the AFPs while strengthening a public solidarity system.

With more than $ 200 billion in assets under management, pension funds are one of the main buyers of local bonds.

Chile’s finances will be under pressure for some time no matter who wins the election, according to Mario Castro, Latin American fixed income strategist at BBVA.

“Although the result is positive on the margin (it eliminates the risk of the tail of certain extreme scenarios in the presidential elections), it does not change things much,” said Castro. “In general, the political risk and the possibilities of fiscal deterioration continue and will continue present and thus things will not change much for the market.”

Original Note: Goldman, BBVA Warn Chile Rally Overdone After Communist’s Defeat

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