Trading the Pacific Alliance

The Pacific Alliance is all the rage in Latin America. As today’s FT special report shows, the members of this newly-formed free trade pact include some of the region’s best-managed and most reform-minded economies: Chile, Colombia, Mexico and Peru. These countries do not represent some kind of Platonic ideal. They suffer problems aplenty. But their governments do pride themselves on hard-nosed business dealing rather than gassy ideology. That being the case, is there a way for portfolio investors to actually trade the idea?

One way might be to buy Pacific country currencies. After all, the supposed aim of the pact is to generate productivity gains, which typically translate over the long term into exchange rate appreciation. But in the long run, as Keynes observed, we are all dead – and in the meantime there may be a sudden rise in US interest rates, as well as a collapse in commodity prices as China’s economy slows.

That would not be good for the currency of any commodity-reliant country, with copper-producing Chile and Peru particularly vulnerable. The exception might be Mexico and oil — if its energy reform leads to the massive inflows of foreign investment many expect.

Another way might be to buy the stock market indices of Alliance countries, and short those of the putatively slower-growing other Latin American countries. But the relationship between economic growth and stock market performance is tenuous, at best. Furthermore, such a trade comes at a price. On average, Pacific Alliance stock markets trade at over 18 times current earnings – a 20 per cent premium to the regional average.

A third way, therefore, might be to drill down and pick some companies that look well set to take advantage of the Pacific Alliance’s program of trade liberalisation and growing Asian links. Romas Viesulas, managing director of Nau Securities, a boutique brokerage, suggests Quiñenco – Chile’s largest holding company.

Controlled by the fabulously wealthy Luksic family, Quiñenco holds large or controlling stakes in the country’s leading banking, beer, packaging, ports and fuel distribution businesses – plus the world’s largest shipper too. In addition, at the current share price of 1,170 Chilean pesos, it is available at a 50 per cent discount to net asset value. Although conglomerates always typically trade at a discount, Quiñenco’s is larger than at other Latin conglomerates, such as Itaúsa (while Carlos Slim’s Grupo Carso trades at a slight premium). It is also head and shoulders above average conglomerate discounts in Europe (25 per cent) or the UK (10 per cent).

However much critics of the Pacific Alliance might say the pact is only “a marketing exercise”, an Alliance-linked stock available at half the price of what its assets are worth might provide a healthy cushion of safety for those punters keen on the idea.

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Related reading:
The New Trade Routes: Pacific Alliance, FT Special Report