Checking In On The Chile ETF (ECH)

by on April 8, 2010 | ETFs Mentioned:

In late February one of the strongest earthquakes on record ripped through southern Chile, just weeks after Haiti was devastated by a similar natural disaster that took thousands of lives and caused billions of dollars worth of damage. With this event still fresh in their minds, many investors anticipated that the quake in Chile could have a severe impact on both Chilean equities and global copper markets.

As reports of the extent of the damage trickled in, fears of a worst case scenario spooked investors. The iShares MSCI Chile Index Fund (ECH) slumped immediately after the quake hit, as nervous investors scrambled to gather and digest information. But the quake didn’t have cause anywhere the amount of devastation that investors initially feared. The capital of Santiago suffered some damage, but came through the weekend in relatively good shape. The Santiago Stock Exchange was even open for business as usual about 48 hours after the quake hit.

By the week after the quake hit, ECH had recovered all the ground lost immediately afterwards. But then the Chile ETF hit a rough patch, sliding by more than 5% over the next three weeks as investors worried about the long-term consequences of the quake.

Earlier this week, the central bank released revised GDP figures, easing some concerns that had been driving the fund lower. The latest expectations are for economic growth of between 4.25% and 5.25% this year, down only 25 basis points on each end of the range from the December report.

On the down side, however, the central bank report said that the 8.8 magnitude quake may ultimately cut annual GDP growth in the first quarter by three percentage points and by two percentage points in the second quarter. Also, inflation expectations were revised from 2.5% to 3.7%, a significant jump that perhaps reflects expectations of continued low rates.

Finance Minister Felipe Larrain recently commented on the country’s efforts to rebuild following the quake. “The government will need to raise $9.3 billion to pay its share of the estimated $30 billion in quake reconstruction costs,” writes Ivan Weissman. “It will raise taxes, use savings held abroad and sell debt to pay for rebuilding its shattered ports, schools and hospitals.”

The central bank report was welcome news for Chilean investors, as the revised data send ECH back to pre-earthquake levels and added fuel to an already strong March rally.

Copper ETF Still Surging

Since Chile is the world’s largest producer of copper, the earthquake also had a major impact on metals markets. The area of Chile hit hardest by the earthquake is home to many of the major Chilean copper mines, and concerns over potential supply disruptions sent the iPath Dow Jones-UBS Copper Total Return ETN (JJC) soaring (the fund finished up 2.7% the Monday following the quake). Copper prices have continued to rise since the quake as concerns about a slump in China have eased and homebuilders have shown signs of life in the U.S. JJC is now up more than 9% since the earthquake hit.

A rise in copper prices would generally be expected to translate into gains in Chilean equities as well, but that hasn’t necessarily been the case since the quake. ECH’s recent slide came despite a continued rise in copper prices as demand from emerging markets has remained strong:

Disclosure: No positions at time of writing.