Betting on a Bounce in Chile

This week’s Global Bull Market Alert recommendation, the iShares MSCI Chile Investable Mkt Idx (ECH), is a high-risk bet that Chile’s stock market will weather the devastation of the earthquake just fine and resume its already strong upward trend.

First, here are a few words on the current state of play. Chile’s capital, Santiago, and home of Chile’s stock exchange, is located about 200 miles northeast of the quake’s epicenter and has avoided the worst of the disaster. Electricity has already been restored to 80% of the city. The airport had resumed operations and several shops were open for business. Late last night, Chilean central bank president Jose De Gregorio announced that Chilean stock markets would operate normally Monday.

Nevertheless, the market will very likely open lower today to trade because of the general level of uncertainty and concerns over damage to infrastructure. Looking back a few weeks from now, I believe this will represent a buying opportunity.

Although initial estimates of damage are running as high as 15% of GDP, these tend to be exaggerated in the heat of the moment. Scenes of devastation notwithstanding, it’s important to remind yourself that Chile is not Haiti. Chile is arguably the most economically successful and, on a per capita basis, the wealthiest country in Latin America. Utilities such as Endesa Chile in Santiago will suffer the biggest impact because of power outages. Santiago-based pulp manufacturer Empresas CMPC SA may be affected because of the proximity of its operations to where the worst of the earthquake was felt. Lan, Chile’s national airline, may fall as canceled flights hurt revenue. But these should all be short-term concerns.

And Chile has been a star this year among emerging markets, up 6.9% this year, the top performer in Latin America, even as the overall MSCI Emerging Markets Index has dropped 5.4%. Bottom line? Chile may sell-off today or even in the next few days. But I believe that Chilean equities will soon find their feet.

So wait for the market open, look for a decent entry point, grit your teeth, and buy the iShares MSCI Chile Investable Mkt Idx (ECH). Place your initial stop at $49.00, just below a level it last hit in December.

Full disclosure: this is a position I intend to take for my clients at Global Guru Capital, once you have had 24 hours to act on this recommendation.

You were stopped out of your position in the iPath DJ AIG Sugar TR Sub-Idx ETN (SGG) last week, as sugar suffered its sharpest drop in the last eight years, down from 29-year highs in early February.

Portfolio Update

UltraShort Euro ProShares (EUO) hit a record high of $20.91 last Tuesday, but pulled back slightly by week’s end. With The Wall Street Journal calling big hedge funds’ positions against the euro a “career-making trade,” you can bet that the world’s smartest money is fully betting against the euro. Some are even looking at euro-dollar parity. Your bet against the European currency remains a BUY.

Mechel (MTL) fell back this past week. With Mechel trading at a 50% discount, compared to its developed market peers, I am keeping this volatile pick as a speculative BUY.

China North East Petroleum Holdings Ltd (NEP) confirmed its reputation as a highly volatile stock last week, falling to as low as $8.68 before rising back to $9.23. I am usually skeptical of such vertigo-inducing volatility. But the fundamental growth story behind this emerging Chinese oil play is just too strong to avoid. NEP remains a BUY.

P.S. Please join me Wednesday, March 3, 2010, at 2:00 pm EST for a FREE, subscriber-only conference when I’ll discuss “Global Megatrends for 2010,” and the best ways to profit from them. All you have to do to participate is answer your phone when we call to connect you on March 3 at approximately 1:55 pm EST, and you’ll be included on the call. However, if you’d like to give us a different number to call on March 3 than the one you originally included with your subscription, simply email us at customerservice@globalbullmarketalert.com.

P.P.S. If you want to keep up with my latest insights on developments in fast-paced global markets, you can now follow me on Twitter on @NickVardy.