Chile has been hit by a powerful earthquake of magnitude 8.8, the fifth strongest ever measured. It released some 500 times the energy released of the recent 7.0 earthquake in Haiti. Fortunately the death toll, while still rising, will be several orders of magnitude less than was the case in Haiti.

Chile is a much more advanced and wealthy economy. Indeed, it is on track shortly to become the first South American member of the OECD. Being one of the globe’s most quake-prone countries, Chile was much better prepared for such a disaster. It has enacted the needed building codes and has a very strong infrastructure. Nevertheless, the damage in some areas was severe.  We will need to wait for a full assessment before we can make a definitive judgment of the implications for investors. Below we give our preliminary thoughts, based on what we now know. 

Chile has been one of our favorite emerging markets. We think it has a history of sound economic and financial management, with the best central bank in Latin America. Last year, 2009, the iShares MSCI Chile Investible Market Index ETF, ECH, total return was 85.26%, outperforming the MSCI Emerging Markets benchmark return of 79.02%. Thus far in 2010 ECH is up 3.5% in sharp contrast to the 5.41% drop in the Emerging Markets Index. Cumberland’s Global Multi-Asset Class, International, and Emerging Markets Portfolios all have overweight positions in ECH.

The three most important sectors in the Chilean ETF are utilities (29.13%), materials (20.17%), and industrials (19.62%).  The largest company holdings in ECH are Chile’s largest private company, the energy company Empresas Copec (13.05%), the electric energy company Enersis (11.29%), another electricity company, Empresa Nacional de Elec (10.41%), the forestry and paper company Empresa CMPC (8.29%), the chemical company Soc Química y Minera de Chile (6.65%), and  the retail store company Cencosud (5.04%).  What about copper, given that Chile is the world’s largest producer? The large domestic producer Codelco is state-owned, and the other large producers are foreign firms such as Anglo American, BHP Billiton, and Rio Tinto.

Copper production and exports are nevertheless of central importance to the Chilean economy and hence to the equity market.  Fortunately the major copper mines are located far to the north of the quake’s epicenter. Damage to production facilities appears to have been minor, and the country’s major copper exporting port is operating normally. Stocks on hand are reported to be sufficient to cover any production or transport delays. Despite these assurances, there may be some precautionary demand pressures this week that could cause a brief spike in prices.

It is evident that there has been serious damage to the nation’s road system, particularly to the key north-south highway. The region around the city of Concepcion was the hardest hit. Firms and the tourist industry in that region suffered the most.  Chile has the resources and ability to rebuild fairly rapidly what has been lost.  While there may well be a temporary near-term downturn in economic performance, we anticipate that the rebuilding effort will come to be the more lasting effect of the quake on the Chilean economy, providing an important positive stimulus later this year. We would view any pullbacks in the Chilean equity market as a possible buying opportunity.