EMLD World Tour June 2021: Chile through an ESG lens

We believe environmental, social and governance (ESG) factors are brought to life when applied to emerging markets. The organic drivers necessary for economic growth align with the factors unique to developing nations. 

Climate-catalyzed human migratory patterns, globally important carbon sinks like the Amazon made vulnerable, or the devolution of democratic governments are some of the issues driving economic performance and risk in emerging markets. We believe these ESG-related drivers will receive increased focus among investors going forward. 

The events in Chile since 2019 have underlined the importance of ESG factors for longer-term value creation. Chile’s favorable economic position allowed it to inject monetary and fiscal stimulus into its economy during the pandemic, enabling it to outperform most emerging markets in terms of growth.

However, in October 2019, 1.2 million people protested in Santiago against the social inequity that had been building for years. Nearly one month later, 29 people had died, 2500 were injured, and over 2800 arrested. 

Income inequality had moved front and centre, culminating in approximately 78% of its voters voting in favor of a new constitution. The new constitution will likely provide more rights focused on education, housing, and healthcare.

While there may be short-term uncertainty, we believe this process should benefit Chile in the long run.  Our view is based on the potential for a modern constitution more in tune with social issues, implemented pragmatically and more inclusive of a larger swath of the population. 

From an investment perspective, we remain cautious on the sovereign in both interest rates and currency. This is due to short-term valuations and the ongoing political uncertainty, as the balance of power between the executive and legislative branches of government remains unclear. 

As in many emerging market countries, ESG factors will likely continue to be salient contributors to Chile’s future and the assessment of the sovereign.  

What’s next in emerging market debt?

We are cognizant of the important connections between developed markets and emerging markets. Recent US data, though improved, have underwhelmed relative to market expectations, providing some stability to US rates and causing market angst around the urgency of potential monetary tightening to ebb. 

Our longstanding view that the US Federal Reserve (Fed) will likely be cautious and slow to act (reinforcing its interest rate path dependency) has been validated by the recent economic data and subsequent market reaction.

This should benefit reflationary assets, including emerging market local fixed income. We expect attractive valuations in both rates and currencies to capture the interest of investors seeking capital appreciation and income-generating fixed income investment opportunities. We believe all growth will be “good” growth for reflationary assets in the near term.