CHAPTER 11

Chile

A DIAMOND IN SOUTH AMERICA’S ROUGH

Chile has reformed its markets as well as any emerging nation. From its days as a despotic military-ruled basket case in the 1970s and ’80s, Chile has emerged as a small but stable player in South America. Inflation, once rampant, is under control. A pro-business government has paved the way for strong commercial enterprise in this resource-rich country. But Chile is a one-horse town when it comes to investing.

Granted, it has the usual commercial enterprises such as banks, retailers, airlines, and tourism. But, it’s a small country and its biggest asset by far is its natural resources, specifically copper. Revenues from copper make up fully one-third of the government’s revenue and with the boom in global construction in the 2000 to 2007 period, Chile was in the sweet spot. Even today, with copper trading at levels well above those in the 1990s, Chile has shown 5 percent-plus GDP growth—amazing considering the major earthquake/tsunami that struck the country in 2010.

Known for a stable banking system and sporting South America’s top sovereign debt rating, Chile has been able to balance its economic system through its rainy day fund, something rare in emerging markets of any size. The country maintains a sovereign wealth fund that has over $20 billion in assets, and the country continues to add to this investment fund in times when copper prices are high. When demand drops or during times of recession, the fund’s capital, which is kept separate from the central bank reserves, can be deployed for stimulus purposes. The size of the fund is very small in nominal terms, but relative to Chilean GDP the fund makes up more than 10 percent of current annual output. It would be like the United States having an extra US$1.5 trillion lying around in non-debt capital to deploy.

Investing in Chile is not for the fainthearted. Like all emerging markets, the Chilean markets are relatively illiquid by U.S. standards and outsized returns or losses are the norm. There are a few individual stocks that deserve to be mentioned. Specifically, LAN Airlines (NYSE:LFL), Chile’s airline, has a solid route system throughout the country and the region, particularly in Peru and Argentina, and also operates a cargo business. Vina Concho y Toro (NYSE:VCO) is major bottler and marketer of premium Chilean wines. South American wines are making strong headway into the global markets, and this company is a pure play on that industry.

A more diversified investment can be made through the MSCI Chile Investable Market Index Fund, which tracks 35 companies that trade on the Chilean exchange. It trades on the NYSE under the symbol ECH. Liquidity is quite good with several hundred thousand shares traded daily. The fund has good diversification with about 20 percent devoted to utilities, 20 percent to industrials, and 20 percent to materials.

One particularly good closed-end fund is the Aberdeen Chile Fund (NYSE:CH), which has returned more than 18 percent on average over the 10-year period ending in December 2010. It offers good diversification and a small dividend. However, it does not always trade at a discount to net asset value (NAV). Most closed-end funds that trade in small emerging countries and offer limited investment choices tend to trade at premiums—the price you pay for entry into a small market. However, even this fund trades at a discount periodically, especially when there is a crash in copper prices. But, unlike the 25 percent-plus discount rule I espouse for buying closed-end funds for countries like China, if you are able to buy into the Aberdeen Chile Fund at a discount between 10 and 15 percent, consider it a job well done. As of July 31, 2011, the portfolio was invested as shown in Table 11.1.

Table 11.1 Portfolio Composition

Source: www.aberdeench.com/aam.nsf/usClosedCh/announcements.

The Reality of Chile Now

Chile holds a special place in my heart. It is where both of my daughters, Isabel and Gabriela, were born. Having spent some time in the country, I have come to admire the fortitude of the Chileans to overcome all manner of crises from bloody coups and dictatorships to massive natural catastrophes like the magnitude 8.8 earthquake that struck the country in 2010, and emerge as one of the region’s healthiest economies with a predictable trajectory.

My first visit to Chile was in the mid-1990s. I remember clearly the November day in 1995. It was memorable because I was trying to get a visa for my daughter to leave Chile and the U.S. government had just shut down operations worldwide as a result of the lack of passage of a budget. This caused embassies and consulates worldwide to close down. It took some intervention from a congressman in Maryland to resolve the visa dilemma.

Chile in the mid-1990s was still recovering from the 17 years of military rule under Augusto Pinochet, the Chilean general who seized power after the coup against President Allende in 1973. Evidence of the coup can still be seen in the form of pockmarks from bullets on the walls of La Moneda Palace (Mint Palace) in downtown Santiago. The country was reviving itself under the presidency of Eduardo Frei and instituting economic and free trade policies that would finally help lift the country out of economic despair and into the twentieth century.

Socially, the country was suffering from widespread poverty, not the type one sees in Nicaragua but an economic malaise that permeated the streets. People were not destitute but most were far from wealthy. A country of just 13 million people, Chile was a natural resource powerhouse waiting to be tapped. A few hours into our visit, one of the members of our group was mugged by a knife-wielding Mapuche in broad daylight just steps from the Plaza de Armas, the main square in town. It took a few seconds to sink in, but the message was clear. Below the surface, Chile still faced issues with its indigenous population.

Santiago is a beautiful city when the haze clears. I knew the Andes mountain range was around somewhere, but the pollution was so thick I could not see them. Finally, one day when I was on the 18th floor of a building, I was able to see over the thick haze and witness their magnificence. On the streets of Santiago crowds bustled into Mercedes buses that flew down the avenues spewing massive amounts of pollution with every push on their accelerators. The weather was crisp and cool as spring was coming to an end.

I did not know what to expect on my visit. I thought Chile to be a backward country with Spanish influence but not on the level of, let’s say, Argentina. Tucked away on the Pacific Coast of South America, Chile is one of the longest and narrowest countries in the world. It has a huge coastline of some 2,700 miles while its width from the coast to the Andes averages just 109 miles. The country is so long that if you are in the north, you are in the Atacama Desert, the world’s driest. In the midsection of the country you enjoy a Mediterranean climate and in the south, a rainy temperate climate. Chile’s extreme south is one of the points of embarkation for journeys to Antarctica.

The Chilean landscape, especially in the southern lakes district of Los Lagos, is spectacular with large alpine lakes surrounded by snow-capped volcanos, the most beautiful of which is called Volcan Osorno, similar in appearance to Mt. Fuji in Japan. The southern part of Chile is also where you will find the biggest population of Mapuche Indians, indigenous inhabitants of the country. However, their population has dwindled, and they rarely frequent the major coastal cities except to visit the local markets.

One thing you’ll notice right off the bat in Chile are people’s names. While Spain was the major influence after its conquest of the region in the 1600s, you will discern the country’s mixed European heritage evident in names like O’Higgins (Bernardo O’Higgins was an early leader) and that of my guide, Norman Jackson Concha. Those of pure Spanish descent look decidedly the same as persons you would see strolling the streets of Madrid or Barcelona, while mixed marriages over the centuries have produced a large population combining features of the Mapuche and Europeans.

Chile is a gastronomer’s dream. The country has superb beef, so good that much of its prime beef is sold to the Japanese. It also has some of the best and widest varieties of seafood on the planet. Fresh seafood is abundant at the coastal markets and it’s cheap and delicious. Chile is also a real estate gold mine if you don’t mind the distance.

Vina del Mar

I sometimes have to chuckle when I hear about city comparisons. Take Vina del Mar, a beautiful coastal city north of Santiago. It is referred to locally as the San Francisco of Chile. Its sister city is Sausalito, just across the bay from San Francisco. While it is doubtless a prime tourist destination with many very good eateries, Vina’s draw is its breathtaking views, with the ocean on one side and mountains on the other. Add to that its casino, restaurants, and relative safety and tranquility and it is easy to see why it is the summer destination for many of Santiago’s wealthy residents and politicians. Chileans tend to have three destinations at their disposal for recreation: the ocean, the mountains, and the unspoiled countryside where many have summer ranches.

I bring up Vina in particular because it offers a very nice price point for those seeking to invest in a stable, clean country outside the United States or Europe. Oceanview condos in Vina start at the low US$200,000 level and rentals in town for a nice two-bedroom condo can be had for less than $800 per month. Vina’s population is less than 300,000, and it’s only a 90-minute drive from Santiago and a metro ride from the nearby port city of Valparaiso where many cruise ships dock. Valparaiso itself is another option if you are seeking a city with a more urbane population.

Vina is a very mature, developed market for residences, which means that if you are a little more adventurous, you can positively steal oceanfront property in many other parts of the country, especially in the south where you can buy entire islands in the Pacific if that is your preference. Chilean coastal travel is easy on excellent roads, and there are luxury buses that will transport you anywhere for a song. Airline service is also excellent, with airports dotting the major coastal cities and frequent service. Getting around cities is also inexpensive using public transport or taxis. Many people look to Brazil, Argentina, or Montevideo for property close to the ocean. Chile offers a better, more stable alternative in my opinion. Locating property is quite easy and many Chilean realtors are online with listings. Buying real estate in Chile and for all of Latin and South America requires a little more due diligence than in the States. Be sure to buy directly from the owner and be sure that your attorney conducts a thorough title search. If you are dealing with an agent on the phone, sight unseen, you can be sure he or she will tell you exactly what you want to hear, which is not necessarily the truth.

Shopping in Chile

Chile is a shopper’s paradise if you are interested in leather and lapis. Shoe shops can be found on every corner, sometimes more than one. Leatherware include items from nearby Argentina as well as locally made products. In the suburbs of Santiago you will find modern malls and shopping centers like the one in Las Condes, called Alto Las Condes, a short subway ride from downtown. There, you will find shops selling shoes and leatherware at surprisingly competitive prices.

But the real bargains are locally made crafts, which can be bought at markets throughout the country. Items like handmade sweaters, hats, handicrafts, and even beautiful copper works are cheap and abundant. Prepare to bargain.

Perhaps the best buy of all is lapis lazuli. There are two places in the world where lapis is mined in enough quantity to be made into jewelry: Chile and Afghanistan. Unless you are a serious adventure traveler, I would suggest Chile. In Santiago, there is a neighborhood called Bellavista where all the lapis shops and factories are located. It is well worth a visit. You could pay for your entire trip to Chile with some choice purchases. Do some research and then go to town. The selection is amazing and very reasonable, downright cheap in some cases compared to what you would spend in other parts of the world. Whether it’s a picture frame or a necklace or a massive carving, you will find it here. Remember, with lapis it all boils down to polish and color—the deeper the blue, the more expensive the stone, regardless of size.

Tourism

Getting to Santiago and around Chile is quite easy. Once in the country travel is cheap and options are abundant. In Santiago proper, taxis, the subway, and other public transport are abundant. Santiago also offers many parks and its main streets and plazas are pleasant and relatively safe for pedestrians. Just don’t try to cross the main thoroughfares unless you are at a crosswalk with stoplights!

It is once you get outside Santiago that the true beauty of Chile can be explored. Over the years ecotourism has become a burgeoning business and with good reason. Chile is all about the water and the mountains. Inland there is plenty to explore around the foothills of the Andes, and as part of the Rim of Fire, Chile is home to more than 50 volcanoes, scattered throughout the country. The tallest is over 18,000 feet. Many are snowcapped and quite a few are active, with the last major eruption in 2011 when the Puyehue Volcano in southern Chile erupted after 50 years of dormancy. Eruptions and earthquakes are part of life in Chile. Most large population centers are near fault lines and the narrowness of the country means that volcanoes are usually not too far away, either. Earthquakes tend to be infrequent, but some major ones have occurred, and this fact should be kept in mind when considering that real estate purchase.

Chile is as long as the United States is wide. It offers everything from high desert to lakes, fjords, the oceans, mountains, and plains. It even offers the world’s most isolated island population at Rapa Nui or Easter Island, a five-hour flight away and inhabited by Polynesians. The island is most famous for its moai, giant stone statues carved hundreds of years ago. The tallest is more than 33 feet and weighs some 82 tons. There are some 887 of them all over the small island, each transported to its location some 500 to 700 years ago.

Chile offers something for everyone and is still quite unexplored by Western tourists. That makes it both a relative bargain and uncrowded. As an emerging market, it offers opportunity to invest in both hard assets like real estate and also in the resource industry as a backdoor play on Asian growth. The government is fiscally responsible, and Chile occupies a place among Tier 1 emerging market countries with little likelihood of reverting to a military dictatorship or heading down a socialist path.

Strengths

The country has a solid banking system, stable currency, and monetary authority. It maintains a sovereign wealth fund that is kept outside the central bank. Chile has massive reserves of copper. It boasts strong GDP growth from both internal growth and exports. Chile has a huge coastline that benefits commerce and tourism. It has a stable government and strong social safety nets.

Weaknesses

Chile is a small country with limited investment opportunities. As a major exporter of natural resources such as copper, it is highly dependent on emerging market growth.

Opportunities

Growth can come from continued expansion of trade with Asia. Ecotourism is still in its infancy. Real estate is relatively cheap for coastal property.

Threats

Natural disasters. Chile sits in an area prone to earthquakes, tsunamis, and volcanic eruptions. While major population centers are not at risk from all of these threats, they are close enough to be affected by one of the three. Competition from countries like Peru, also a major resource-exporting nation, that are targeting Asia. Chile has a much more transparent and fluid economic engine, however.