Chilean assets soared on Monday after arch-conservative José Antonio Kast advanced to the second round of voting as a clear favourite against the communist Jeannette Jara.
The peso rose as much as 1.8 percent, reaching its strongest level since October of last year, bucking the downward tend in other emerging-market currencies. The IPSA stock market index jumped 3.4 percent at the open. The cost of insuring Chilean debt against default over the next five years tumbled almost five basis points to 50, while two-year swap rates reached the lowest since September 8.
Kast emerged victorious among a field of right-wing candidates whose supporters he’s now likely to pick up, positioning him as the favourite in the December 14 run-off. Jara moved on to the second round but with fewer votes than expected. Kast has pledged to deregulate the economy and slash corporate taxes, while cracking down on criminal gangs and deporting thousands of undocumented migrants.
“Both the currency and rates offer upside,” said Alfonso de la Torre, emerging markets sovereign fixed income analyst at PineBridge Investments. “Fiscal consolidation will reinforce Chile’s already strong credit and addressing productivity can help the country resume its convergence to developed market income levels, a process that has stalled for the last decade or so.”
Jara secured 26.8 percent of ballots, while most polls had forecast she would gain over 30 percent. Kast followed close behind at 23.9 percent.
Still, Kast’s party and other like-minded conservative groups appeared to fall short of a simple majority in both houses of Congress. They’ll probably need to ally with a populist third party — Partido de la Gente — to get there in the lower house, while the Senate is just out of reach. Attention will likely now shift to Kast’s ability to negotiate accords in Congress, or side-step them on the some controversial issues.
“The Chilean peso is already pricing in Kast’s victory in the second round,” said Klaus Kaempfe, head of investments at Credicorp Capital. “If Kast’s government consolidates its power and has a strong first 100 days, the peso could break through the 900-mark decisively.”
Bank of America strategists Ezequiel Aguirre and Christian Gonzalez Rojas expect the peso rallying 4our percent in the next six months, while JPMorgan see it up as much as 8%. In bonds, Barclays said it is overweight on Chilean debt.
“We view Chile as a defensive long in an environment of historically tight credit spreads,” Barclay’s strategist Jason Keene wrote in a note Monday.
by Carolina Gonzalez, Bloomberg
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