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Morgan Stanley favors Chilean assets amid improving macroeconomic conditions

EditorRachael Rajan
Published 25/09/2023, 14:32

Morgan Stanley (NYSE:MS) has expressed a positive stance towards Chilean assets, including sovereign debt, in light of an improving macroeconomic environment and reduced political risks. The recommendation comes after a prolonged period of political instability, public demonstrations, and economic stagnation in the country.

Analysts Emma Cerda and Simon Waever advised that Chile's dollar and euro bonds have become more appealing compared to those from Peru, Mexico, and Uruguay. They recommended purchasing Chile's 2071s or establishing long positions in Chile's 2034 bonds in euros while shorting Peru's 2034s in the same currency.

Several factors underpin their recommendation. These include attractive valuations of Chilean assets compared to most investment grade entities, no expected issuance in the near future, and a steadily improving macroeconomic environment. The analysts also pointed out that political risks have declined as the government has been forced to scale back its tax increase plans, and attempts to drastically overhaul the constitution have stalled.

However, not all market participants share Morgan Stanley's optimism. Traders from firms such as PGIM and Pictet are maintaining a cautious stance, seeing limited potential for spread narrowing at present. Meanwhile, BTG (LON:BTG) Pactual has warned of persisting risks. The bank highlighted that Chile's dollar debt has almost quadrupled over the past four years with more debt sales expected before year-end.

In recent market activity, the price of Chile's sovereign 2033 dollar bonds has dropped to 78 cents from 82 cents in early August, reflecting declines in U.S. equivalents. Similarly, the yield on Chile's generic 10-year bond has risen to 5.56% from a low of 4.60% in April.

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