Just weeks after a devastating earthquake sparked a humanitarian crisis in Haiti, another natural disaster has hit the South American nation of Chile. Early Saturday morning, a magnitude 8.8 earthquake, the fifth strongest ever measured in the country, occurred off of Chile’s coast, causing massive destruction throughout the region. At least 100 aftershocks of magnitude 5.0 or greater have hit since the quake, complicating relief efforts significantly. The death toll has already topped 700, and is expected to rise as aid workers scramble to reach the areas hit hardest. “We’re facing an unthinkable catastrophe that will require an enormous effort in resources,” said Chilean President Michelle Bachelet in a televised address.
Late on Sunday, Chilean central bank president Jose De Gregorio announced that Chilean stock markets would operate normally Monday, with the opening bell scheduled to ring at 9:30 a.m. local time. “The payment and settlement systems are operational. This will allow financial markets to operate normally on Monday,” said De Gregorio in a brief statement. Elsewhere in Santiago, some signs of a return to normalcy were visible: the airport had resumed operations and several shops were open for business. In towns close to the epicenter, looting has already become a major problem, and several areas are under military control and strict curfews. The government reportedly reached a deal with Chilean supermarkets to give away basic goods in an effort to prevent looting and efficiently provide relief services.
The massive earthquake presents a tremendous obstacle to an economy that had recorded several major milestones in recent years. Bachelet, a popular president credited with guiding Chile through the global financial crisis, is in her final weeks in office, prohibited by the Chilean constitution from serving back-to-back terms. She is due to be replaced by billionaire conservative Sebastián Piñera on March 11. In a televised speech, Bachelet said dining halls in public schools would soon be equipped to serve two million meals a day in devastated regions, adding that the government would likely seek international aid for field hospitals and rescue workers.
After being elected in 2006, Bachelet’s popularity took an initial hit when her government came under pressure to spend some of the windfall earnings resulting from high copper prices. Bachelet’s refusal to spend carelessly paid big dividends when the global financial crisis set in, as government coffers were flush with cash accumulated over previous years. Chile implemented one of the world’s largest stimulus plans, including cash stipends for the poor and massive infrastructure spending. Chile’s economic fortunes depend in large part on demand for copper, one of the country’s most abundant resources. But several areas of the economy have expanded in recent years, most notably the financial industry.
Chile’s GDP contracted by nearly 2% in 2009, and the central bank had previously been expecting the economy to expand by 4.5% to 5.5% in 2010. Economists expect the earthquake to shave between 100 and 200 basis points off of 2010 growth, and anticipate a delay to interest rate hikes that had been expected to begin in coming months.
Investors looking to gain exposure to South America have historically gravitated towards Brazil, a member of the now famous BRIC bloc of economies expected to account for a significant portion of global growth in coming decades. But in recent years, a number of ETFs have popped up offering targeted exposure to other equity markets in the region, including the FTSE Colombia 20 ETF (GXG) and All Peru Capped Index Fund (EPU). In addition to these funds, the MSCI Chile Index Fund (ECH) has become a popular way to efficiently access South American stocks. Since its launch in late 2007, ECH has accumulated nearly $400 million in assets, and currently trades more than 150,000 shares per day.
ECH is designed to replicate the performance of the MSCI Chile Investable Market Index, a benchmark that consists of stocks traded primarily on the Santiago Stock Exchange. Santiago is located about 200 miles northeast of the quake’s epicenter, thereby avoiding the worst of the disaster. But the capital still saw extensive damage. Following the quake “a car dangled from a collapsed overpass, the national Fine Arts Museum was badly damaged and an apartment building’s two-story parking lot pancaked, smashing about 50 cars whose alarms rang incessantly,” according to an AP report.
ECH currently consists of 32 individual holdings, the largest of which (13.6% of holdings) is Empresas Copec SA, the Chilean energy and forestry company. Not surprisingly, ECH is tilted most heavily towards the utilities, materials, and industrials sectors. As of Friday, ECH was up about 3.6% on the year and almost 70% over the past 52 weeks.
Copper ETF On The Move
The impact of the devastating quake has already been felt in global commodity markets. Chile is one of the world’s largest producers of copper, and prices of the widely-used metal soared in electronic trade screening on Sunday night. Analysts noted that the impact on copper supplies could be limited because southern parts of Chile were the hardest hit. Most mining operations are located in the north of the country. “Still, there are reports of at least some disruptions,” writes Allen Sykora. “Additionally, even if mines suffer limited damage, analysts said, there are still other worries, such as availability of electricity and fuel, plus transportation of metal to the market, at least in the short term.”
As of Sunday night, the possibility of supply disruptions in Chile had caused copper contracts to jump by about 5% on the COMEX division of the New York Mercantile Exchange. Copper contracts are a component of several metals ETFs, including the PowerShares DB Based Metals Fund (DBB) and UBS E-TRACS CMCI Industrial Metals ETN (UBM). The iPath Dow Jones-UBS Copper Total Return ETN (JJC) consists exclusively of copper futures contracts, and figures to open significantly higher Monday. JJC has already gained more than 100% over the lat year (see this guide to copper ETFs).
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Disclosure: No positions at time of writing.