Tag Archives: chile

Why Invest In Chile?

I’ve heard it said that asset allocation means always having something to complain about. A brilliant asset allocation will have long periods when one or more component of the portfolio fails to appreciate. And for investment management a long period of time can be a decade or more. This past year the MSCI Chile Gross Index lost -16.58% as measured in US dollars. Chile is down -50.64% since it peaked at the end of April, 2011 with a 5-year annual return of -13.04%. The longer the downturn for a particular portfolio holding the greater the feeling that we should simply eliminate it from the portfolio. It is “doing nothing but going down” we say because our minds are apt to frame the movement in the present tense rather than the past tense. Our brains are very quick to find short term patterns and project them forward as long term trends. This cognitive ability is useful in many areas, but it is not particularly useful in investment management. Investments are inherently volatile. The rebalancing bonus which comes from having an asset allocation is dependent on two variables: volatility and correlation. The more volatile and less correlated your asset classes are the greater the rebalancing bonus you get from having those components in your portfolio. When you compare Chile to the S&P 500 Total Return since the beginning of 1988 when the Chile Index began, the S&P 500 had a 1,540.25% appreciation, growing $10,000 into $154,669. It averaged 10.28% annually. Even though the S&P 500 had phenomenal growth during the time period, it also experienced an entire decade where it dropped -29.48% and a 30 month period where it dropped -43.75%. Over the same time period, Chile had a 3,585.25% appreciation, growing $10,000 into $368,524. It averaged 13.75% annually. Click to enlarge Having twice as much growth as the S&P 500 over 28 years comes with the price of greater volatility. The standard deviation of annual returns for the S&P 500 was 14.39% while the standard deviation for Chile was 24.21%. This type of volatility is normal for the markets. While you might have had more money putting everything in Chile, we recommend a blended portfolio. Each individual component of a balanced portfolio is more volatile than the portfolio as a whole. Thus, adding a little bit of Chile to your portfolio can boost returns and reduce volatility on account of the rebalancing bonus. In fact, over this time period the mix which had the lowest volatility was 12% Chile and 88% S&P 500. This blended portfolio had an average return of 10.96% and a standard deviation of just 14.25%. This is a boost to annual returns of 0.68%. Over this time period, adding 12% Chile to your portfolio resulted in an extra $29,095 over the S&P 500 alone. Creating a mix of 19% Chile and 81% S&P 500 would have had no more volatility than a portfolio of 100% S&P 500. But this portfolio would have averaged 11.32%, and extra 1.05% annually and earned an additional $46,784. The return of these blended portfolios over long periods of time produce a risk return curve which can help investors find what asset allocation produced the greatest return for a given amount of risk. These blended portfolios are called the efficient frontier and produce curves between moving from 100% S&P 500 to 100% Chile. Click to enlarge Notice that with only these two choices, investing any less than 12% in Chile is not on the efficient frontier because there is a portfolio for which a greater return could have been achieved while experiencing an equal or lower volatility. In actual portfolio construction, there are dozens of components which are being fit together to craft a brilliant investment strategy for long term time horizons. Our current asset allocation model usually invests less than 2% of a portfolio’s value in Chile. Even if Chile were to lose half of its value the portfolio value would only go down 1%. Assuming that Chile doesn’t move in sync with other investments in the portfolio, this is a level of volatility which is acceptable for the potential additional return. As it turns out, the correlation between the monthly returns of Chile and the S&P 500 are low at 0.46. It is always disappointing when an investment category fails to perform as hoped. But after an investment has fallen in price it is often that much more attractive looking forward. Unlike individual stocks, a country index cannot go to zero. If the Chile index approached zero, you would be able to take your pocket change and buy every publicly traded company in Chile. Long before you could do that, people much wealthier than you would notice how low the price was and they would buy every company in Chile. Low prices for a country index is best thought of as the index going on sale. Stocks often move on very light trading as a few sellers push the stock price lower. Market makers who hold all the stocks in the index gradually move the price lower when there are more sellers than buyers. A market maker is forced to buy when there is no one else interested in buying. But at some point the price is low enough to wake up other potential buyers and the movement in price finds resistance. This can cause greater swings of volatility often over long periods of time. As a result, you should not be afraid of an major index. Assuming there were good reasons to be invested in it in the first place , a 3, 5 or even 10 year down turn is not a reason to abandon your brilliant investment strategy.

Will Falling Silver Production Start To Impact SLV?

Summary The price of SLV lost 9% of its value during 2015. Silver production may drop in 2015 — for the first time in over a decade. As the deficit in silver keeps rising, this could eventually start affecting the price of SLV. The silver market didn’t have a good year as the price of the iShares Silver Trust ETF (NYSEARCA: SLV ) shed over 9% off its value. The direction of silver will continue to be dictated by the direction of long term interest rates and U.S. dollar (among other things that silver investors look for when investing in the precious metal). But what about the changes in the physical demand and supply for silver? After all, the ongoing low silver prices contributed to the decline in silver production this year – perhaps 2015 will be the first year since in well over a decade, in which production won’t rise. Will this be enough to drive up the price of SLV? I have already addressed the recent rate hike by the Fed and its impact on SLV. Currently, the market isn’t convinced the Fed will raise rates by another 1 percentage point as its members estimated in the last FOMC meeting. The implied probabilities , as collected by Fed-watch, suggest the market projects only two hikes of 0.25 basis points in 2016. If the Fed wind up raising by only 0.25bp or not raise at all, this could bring back down long term interest rates and perhaps even depreciate the U.S. dollar – two shifts that could behoove the price of SLV. What about the changes in production? According to the Silver Institute the balance between supply and demand was in deficit (i.e. the demand was higher than the supply). And this has been the case for the past 12 consecutive years . This year’s deficit is expected to settle at 21.3 million oz – the lowest deficit in a decade. This decline in deficit is mostly due to net outflows from ETFs holdings and derivatives exchange inventories. Basically, as the demand for silver as investment diminishes, it helps ease the physical deficit. But there is also the matter of falling production that could increase this deficit. Up to 2014, production has been rising. This year, however, it seems production hasn’t picked up and perhaps even slightly declined. Among the top leading countries the produce silver: Mexico, Peru, China, Australia and Chile, according to one outlet , total production in these countries is slightly down for the year (up to August) – by less than 1%. So it’s still unclear how the year will end for the silver balance. But even if this year the deficit expands again, it doesn’t mean this trend will be enough to push up the price of silver. The high deficit in recent years including 2013 and 2014 hasn’t helped rally the price of silver. But perhaps this could also be a matter of timing. Eventually the deficit in supply-demand balance will matter enough to pull up the price of silver, especially as silver loses its shine as investment. When will this happen? That’s unclear. Therefore, for the near term it still seems that the direction of SLV will be govern firstly by the changes in the demand for silver as an investment tool and only secondly by the changes in supply and demand for physical silver. This means the direction of the U.S. dollar, other precious metals – most notably gold – and long term interest rates will set the pace for SLV. In the coming months, I won’t be surprised if the Fed takes a more dovish tone than it took in its recent statement, which could actually slightly pull up SLV. Finally, in the medium term, the growing deficit in silver – mostly driven by falling production and rising physical demand – may take a bigger role in moving the price of silver. For more please see: What’s Up Ahead for Silver in 2016?

Chile As A Proxy For Copper

Summary Copper has fallen a great deal in recent months, which means a bounce in prices is likely. Copper is extremely important to Chile’s economy, which makes it very vulnerable whenever prices go down. Chile will most likely remain weak in the near future even if copper prices recover somewhat. Prices in the commodity sector have certainly been on the decline. Of all the commodities that have seen prices go down, one of the worst affected has to be copper (NYSEARCA: JJC ). Copper has in fact been on the decline the last four years and is now down roughly 60 percent from its highs in 2011. This decline has even accelerated the last six months with prices down by a third. The two charts below show how copper has behaved the last five years and the last 12 months: Such a big decline of more than 30 percent in such a short amount of time increases the odds of a bounce in copper prices. Copper is very much oversold, and there is a good chance that prices should go up somewhat at these levels. Those who are still negative on copper may therefore be interested in an alternative, and that alternative can be found in the country of Chile. Why Chile can be considered a proxy for copper Chile is by far the biggest producer and exporter of copper. For the whole of 2014, statistics show that Chile contributed 5.8 million metric tons of copper with global production at 18.7 million metric tons. Copper makes up almost half of Chile’s total exports, making its economy highly dependent on whatever happens to copper. If copper prices go down as they have been in recent times, Chile is bound to feel the effects. Economic indicators suggest that Chile is getting weaker as copper prices are sliding. For instance, exports have been shrinking, led by the decline in copper prices, as the chart below indicates. Both the government budget and the trade balance are now in a deficit, which seems to be getting bigger as time goes by. A sharp reversal from the sizable surpluses seen in recent years: (click to enlarge) Overall, growth in Gross Domestic Product (“GDP”) is slowing down, and the economy is struggling to avoid falling into a recession. The weakness in Chile’s economy is best reflected in the exchange rate between Chile’s domestic currency, the peso, and the U.S. dollar. The peso has already lost 17.5 percent of its value in 2015 and further devaluations are very likely, if not necessary, versus the U.S. dollar. The current trend certainly does not look good for Chile. (click to enlarge) Copper prospects While copper prices may witness a bounce in the short term, if only because of oversold conditions, a return to recent highs is highly unlikely. The strong growth of copper in recent years was primarily driven by China, which now accounts for almost half of the global consumption of copper. However, growth in demand for copper in China seems to be moderating and is now only in the low-single digits. Demand for copper outside of China is much weaker. The International Copper Study Group (“ICSG”) forecasts a flat market for copper with supply and demand evenly balanced. Much will depend on what happens in China or its economy, but there isn’t much demand for copper globally once you ignore China. There’s the possibility that there may be a slight deficit in copper supplies next year, especially if companies cut production more than expected, but nowhere near the levels seen in previous years. This should help keep a lid on copper prices, which is not good news for Chile. Chile relative to copper Since copper is oversold as a commodity, it’s realistic to expect a bounce in prices in the not-too-distant future. Initiating new shorts at these levels is therefore not recommended, at least for now. Those who are still negative when it comes to copper may instead want to look at Chile as an alternative or a proxy to copper. Exposure to Chile can be had through, for instance, ETFs such as the iShares MSCI Chile Capped ETF (NYSEARCA: ECH ). Chile could also serve as a hedge for any long or short positions in copper. For instance, a long position in Chile to offset a short position in copper or vice versa. This will remain the case for as long as Chile’s economy is heavily dependent on the export of copper and it does not diversify its economic base. The fact is that Chile is overly exposed to the prospects of a single commodity (“copper”), which in turn is highly dependent on the prospects of a single country (“China”). If copper prices go up by a lot, it’s boom time for Chile. But, if copper prices go down, Chile’s economy will get weaker. Not a very healthy situation to be in. The bottom line is that even if copper prices were to increase somewhat in the future, Chile will still not experience the windfall it received in previous years. For that to happen, copper would have to return to the very high prices of several years ago. A very unlikely prospect. Chile can be expected to remain relatively weak even if copper experiences a bounce in prices.