Equity Strategy: A Short-Term Rally Is Impending
Although w e believe that the Chilean economy's heavy exposure to the long-term trend of lower metals prices and weaker demand from China for copper exports will further weigh on the country's benchmark IPSA equity index over the coming months, we are becoming increasing ly constructive towards the index for a near-term bounce for reasons both fundamental and technical . Fundamentally, our Commodities team has adopted a positive short-term outlook for metals prices, underpinned by a glimmer of optimism towards Chinese demand prospects for the coming months following suggestion of an impending 'mini-stimulus,' and better than expected manufacturing PMI and import figures from China for July (see 'Temporary Reprieve For Metals,' August 8).
Copper prices have broken through resistance at US$7,000/tonne, and with sentiment towards metals and mining companies having collapsed to bearish extremes in recent months, with net speculative short positions dropping below 2009 levels following the global financial crisis, the recent positive data from China looks set to spur a short-term relief rally. Moreover, global copper inventories have begun to fall from early 2013 highs, suggesting an easing of downward supply pressures (see chart). While the IPSA is not as heavily weighted towards basic materials as other industrial metals exporters in the region, such as Brazil and Peru, a jump in metals prices is still likely to improve sentiment towards the economy overall, boosting the performance of equities across most sectors.
From a technical perspective, after a broader double-top reversal appears to have played out on the IPSA, the index has broken through short-term support-turned-resistance around 3,700, and there could be upside of around 9.5% before a test of neckline resistance at 4,100 (see 'Chilean Equities Poised For A Bounce,' July 22). We highlight that a bullish divergence has formed on the daily relative strength index (RSI), suggesting the current downtrend may be overstretched. A break at 4,100 would be a highly bullish signal, indicating additional gains. Moreover, valuations on the IPSA have cheapened to a PE ratio of 18.8x, the first time the PE ratio has dropped below the five-year average of 19.7x since late 2011.
|Watching For Confirmed Close Above 3,700|
|Chile - Benchmark IPSA Equity Index And MACD & RSI (Daily)|