(Bloomberg) -- JPMorgan Chase & Co. is turning bearish on Chilean stocks as the country's worst civil unrest in decades compounds the effects of lackluster growth and a grim outlook for an economic overhaul.
“A combination of unattractive macro, with poor bottom-up options, rich valuations and now, added social-political instability, made us take profits on Chile,” JPMorgan strategists led by Emy Shayo Cherman wrote in a report Tuesday, downgrading the country's equities to underweight from neutral.
Chile's IPSA equity index had its worst day in almost two years Monday as a wave of riots and protests -- sparked by a four-cent hike to subway fares -- led to thousands of arrests and 15 deaths. After saying Chile was “at war,” President Sebastian Pinera has softened his tone and pledged the government would seek dialogue and work on social measures. The nation's stocks and currency are trading slightly higher today.
The economic overhaul proposed by the government -- including changes to employment laws, taxes and pensions -- faces strong opposition in Congress, the JPMorgan team wrote. It said labor costs are likely to rise, citing a proposal by the Communist Party that JPMorgan estimates will lead to a 10% increase in corporate labor costs.
JPMorgan said that shares of shopping malls are particularly likely to suffer from the protests.
Meanwhile, JPMorgan also raised Peruvian stocks to neutral on attractive valuations. The bank has an overweight rating for Brazil and Colombia and is underweight Mexico and Argentina.
--With assistance from Laura Millan Lombrana and Eduardo Thomson.
To contact the reporter on this story: Vinícius Andrade in São Paulo at vandrade3@bloomberg.net
To contact the editors responsible for this story: Brad Olesen at bolesen3@bloomberg.net, Brendan Walsh, Carolina Wilson
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