Equity Strategy: Upside Potential In ICT And Utilities
We are bearish towards Chile's benchmark IPSA equity index, as expressed through our view for the IPSA to underperform Mexico's IPC blue-chip index in our Americas Asset Class Strategy ( see 'Bullish Mexico's IPC Over Chile's IPSA', March 20). While the IPSA has rallied by 17.0% since hitting a recent low of 3,369 on January 31, due in part to a period of positive risk sentiment towards Latin American equities, we believe the current rally will run out of steam in the coming weeks.
With the index having held to trendline support at 3,910 in recent trading, we do not rule out some additional upside for the IPSA. However, we believe that key resistance at the 4,100 level will be stiff in the event that it is tested, given weakening economic activity in Chile. Indeed, we recently revised down our 2014 real GDP growth forecast from 3.4% to 3.1%, implying a substantial drop-off from 4.1% real GDP growth in 2013 ( see 'Growth To Slow on Weak Investment And Private Consumption', May 20). Moreover, valuations on the IPSA look unattractive, with the trailing price-to-earnings (PE) ratio at 22.1x, compared to the 10-year average of 19.4x, and corporate earnings stagnating amidst weak economic activity. Should the IPSA bounce off resistance at 4,100, we expect the index would continue heading lower, potentially towards the 3,600-3,700 range, where it has seen extensive trading in recent months.
Performance By Sector
|Approaching Stiff Resistance At 4,100|
|Chile - Benchmark IPSA Equity Index|