What has happened?
After a month of protests in 2019, the Chilean government agreed to hold a referendum on whether the constitution - unchanged since the Pinochet era1 - should be rewritten. After a pandemic-induced delay, the vote took place in autumn last year, with Chileans voting overwhelmingly for the constitution to be rewritten, and for the 155-person convention2 tasked with drafting it to comprise wholly elected citizens, rather than an equal mix of lawmakers and citizens.
The vote to elect this convention took place in May 2021, where the success of independent candidates surprised. This success came at the expense of the governing party’s candidates, who fell short of securing the third of the seats needed to block proposals. The delegates will now spend the next nine months drafting a new constitution, which will then be subjected to another public vote. If it is rejected, the current constitution will remain in effect.
Following the vote, the local stock market dropped by 23% from its March peak3, though has since recovered somewhat. Many of the companies we own have been similarly impacted.
Why has this happened?
The Pinochet-era constitution is viewed by many Chileans as a monument to the neoliberalist economics espoused by Milton Friedman and enacted by the ‘Chicago Boys,’ a group of Friedman’s disciples who were granted the power to implement free-market policy under Pinochet’s authoritarian regime from 1973. The opening of the Chilean economy to imports, reduction in fiscal spending, and privatisation of many state-owned assets was accompanied by the privatisation of education, healthcare, and pensions. While Pinochet’s Government Junta ultimately gave way to democracy, the Chicago-inspired economic system remained.
The neoliberal policies - often dubbed ‘The Miracle of Chile’ - are widely praised for Chile’s subsequent economic success. Today its age, and flaws, are beginning to show. Despite the number of universities increasing nearly 20-fold since the 1970s, fees as a percentage of income are the highest of the OECD countries.4 Despite mandatory 10% employee pension contributions, 80% of pensioners receive less than the minimum wage.5 Despite over 80% of the population paying public health insurance contributions from their salary, 66% of doctors work exclusively in the private system, where monthly premiums average 45% of minimum wage.6
The discontentment, therefore, is centred on the guarantees absent from the constitution. The seeds of the current referendum were likely sown in the 2011 student marches7 - arguably the first public interrogation of ‘the Chilean Miracle’ - which brought only narrow change. It was in the context of this unresolved resentment that a four-cent fare hike on the Santiago metro ignited the most recent protests.
Why do we remain optimistic about Chile?
In spite of the turmoil and uncertainty described above, we remain optimistic about Chile’s future. We know neither what form the draft constitution might take, nor whether the Chilean people will vote to have it replace the old one. Our conviction is instead informed by our understanding of the cultures and histories of the Chilean companies we hold. The Stewart Investors Latin America Strategy has just under 30% exposure to Chile (vs. 6% for the MSCI EM Latin America Index); the Stewart Investors Global Emerging Markets Leaders Strategy has around 6% exposure (vs. a negligible weighting in the MSCI Emerging Markets Index ).8
This, as ever, is solely explained by franchise quality rather than a top-down view. That we find an abundance of high-quality franchises in Chile is, in our view, no coincidence. Chile’s history of transparency and openness has built a high watchtower from which to observe track records uncomplicated by interventionist government policy. Whereas in many countries in our investible universe the ability to navigate myriad rules and regulations is often as much a driver of success as inherent franchise quality, in Chile success is decided by quality of product/service alone. While the reach of the state in business may lengthen, we believe this will diminish neither the quality nor focus of our holdings’ stewards.9
Increased state influence may not be a bad thing, if they set countries, and companies, on a more sustainable path, and to expect governments never to intervene is not realistic. The ideas in Rebecca Henderson’s book Reimagining Capitalism in a World on Fire - published mere months before the referendum - could not be timelier; its overt rejection of the Friedman doctrine - that a business’s sole aim should be to maximise shareholder returns - is highly relevant for a country whose constitution enshrines Friedman’s economic philosophy. In a recent article she concludes that ‘free markets need free politics,’ explaining that ‘when markets are no longer held in check by governments that can police the rules of the game, appropriately control externalities, or provide the public goods necessary to support real opportunity, they become too powerful for their own good.’10
This provides a useful lens through which to look at some of our holdings, primarily because we aim to back stewards whose focus on longevity ensures that they already have, to some degree, policed themselves, and thus are less vulnerable to such changes.
In the case of BCI* (one of Chile’s largest banks) this has translated into a willingness to cut into its own fee income by launching MACH, a free digital wallet, with the mission of making financial services accessible to every Chilean. The story is similar at Falabella*, where the retail credit card business was evolved into a fully-fledged bank now famous for lowering the access barriers to opening an account. Any future government is likely to be supportive of banking that lowers the cost of access to credit and eliminates high fees.9
In the case of Enel Chile* (energy generation and distribution), we are encouraged by its low-cost and carbon-free hydro, solar and wind generation portfolio. They have committed to achieving zero coal, oil and gas exposure by 2023, having already fully impaired their existing plants and set closure dates. By its own estimations, 91% of Enel Chile’s electricity generation will come from renewables (vs. 57% in 2020). In the context of what is mandated by Chilean Law, which is a floor of 20% by 202511, this is exceptional and somewhat insulates the company from likely regulatory change.
It is also no coincidence that the majority of companies we own in our funds are consumer-facing, where the influence of government is more limited. One such example is CCU*, a core holding, which is the oldest and largest brewer in Chile whose longevity - which has spanned five republics, some forty presidents, and may soon span four constitutions—is attributable only to the quality of its products and brand, and time horizon of its stewards. The decision of CCU’s controlling shareholders - Quiñenco and Heineken - to increase their stake last month confirms a continuation of the tradition of long-termism which informed our initial investment.
The current uncertainty in Chile seems both to slow down time and hamper visibility. This is natural. When a light wave enters a denser medium - where its speed slows - it refracts towards the normal. Until the density of this medium can be determined, there is no knowing - nor point trying to predict - the angle of refraction. What we can know is that once the wave passes through this medium, its angle of emergence will be equal to its angle of incidence. In simpler terms, the waves which enter at the acutest angle from the normal will exit at the acutest angle from the normal. We expect our companies to do the same.
*Source for company information: Stewart Investors investment team and company data. This stock information does not constitute any offer or inducement to enter into any investment activity nor is it a recommendation to purchase or sell any security. Holdings are subject to change.
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