SET Monthly Issue March 2016
The 11 Thousand Mile Connection
It is 11,705 miles from Shanghai, China to Santiago, Chile.
Flying time is brutal, more than a day, because there aren’t any direct flights. You need to go through Paris, Miami, Sydney, or even Chicago.
But the vast distance between China and Chile suddenly shrinks when you examine things from the perspective of business.
Specifically, when you look at one of the world’s essential commodities, you’ll see that China and Chile are joined at the hip.
The commodity is copper, and the ETF we are recommending this month gives you a better way to profit from what lies ahead for this metal.
Copper is used as a conductor of electricity, a building material, and is blended into metal alloys.
The world’s #1 importer of copper ores, anodes, and refined copper is China. The world’s #1 copper exporter, producing 31.7% of the world’s copper exports, is Chile.
So it’s no surprise that China’s economic slowdown has sent an economic tsunami thundering across the Pacific that has devastated Chile.
(An actual tsunami struck Chile in September 2015. More than a million Chileans fled their homes when the massive waves hit.)
If you were bullish on the outlook for copper prices, and wanted to focus just on the commodity itself, you could invest in an ETF like the iPath Dow Jones-UBS Copper Subindex Total Return ETN $JJC or the Global X Copper Miners ETF $COPX.
But we would like to show you…
A Better Way To Profit
We are recommending the Aberdeen Chile Fund, Inc. $CH.
This interesting ETF will give you three different ways to make money:
- The rebound we anticipate in copper prices.
- The economic rebound we see unfolding in Chile.
- The fact you’re buying stocks priced in a weak Chilean currency with a strong U.S. Dollar.
First, let’s look at China’s appetite for copper. Then, we’ll look at what’s happening in Chile, and the scenario we see as China returns to its historic patterns of copper imports.
China’s Appetite For Copper
China’s appetite for copper is enormous. No other country buys as much… it accounts for 40% of global demand.
But China isn’t buying copper like it used to. Domestic demand for copper has been driven down by the slowing economy.
This year, imports are expected to shrink by 10% based on research from the trading house Arc Resource Co.
China has its own modest copper production. Industrial buyers will shift their purchases and source a lot of their copper domestically.
Through the first three quarters of 2015, China’s copper purchases were down 4% to 2.55 million metric tons compared to the same period in 2014.
This reflects the slowdown in growth. China’s economy slowed to a growth rate of 6.9% in the third quarter of 2015. Since May 2015, industrial production has skidded more than 20%, one of the key reasons why there’s lower copper consumption and lower demand.
When will China regain its lost appetite for copper? One leading industry group, the International Wrought Copper Council, expects demand for refined copper to grow by 3.1% in 2016 and another 3.3% in 2017.
Analysts figure most of this 2016 growth will come late in the year.
Certain types of industrial activities will impact China’s copper imports more than others. For example, major projects such as power grid development, where copper for wires is needed, will have a disproportionate effect.
Spending on China’s massive State Grid project slowed down last year because of a corruption scandal investigation. Largely because of this, the government’s financial targets for investment in the project have fallen short.
When activity picks back up, there will clearly be a renewed appetite for copper.
And the #1 beneficiary will be Chile.
As China struggles through the downturn in growth and moves through the current cycle, global copper prices have taken a hit.
Look at what’s happened over the past five years…
What’s Happening Right Now In Chile
We’re in the classic economic calm before the storm. It’s a waiting game. Chile is waiting for China to start buying copper again.
Copper is as important to the economy of Chile as gaming is to the economy of Nevada.
It’s the #1 copper producing country in the world. It produces 5.75 million tons a year, about four times as much as the U.S.
But since 2011, with the price of copper cut in half, big mining companies have slashed spending. The shockwaves have rattled virtually every corner of the Chilean economy… especially its currency.
The combination of a strong U.S. Dollar and sagging copper exports have stripped away 40% of the value of the Chilean Peso over the past three years.
On the bright side, Chile’s national debts are relatively low.
There’s a left leaning government, but the new finance minister, who has been on the job for ten months, is a moderate. Rodrigo Valdés enjoys significant support from Chile’s business community.
What does Chile need, along with a rebound in copper exports?
A more solid free market system, improved public services, better education, and less influence passed along from generation to generation of old school families.
So far, economic recovery hasn’t kicked in. This means now is an ideal time to start acquiring shares of The Aberdeen Chile Fund.
PROFILE: THE ABERDEEN CHILE FUND (NYSE) $CH
| Net Assets: | $52.66 Million | ||
| Exchange: | NYSE | ||
| Recent Share Price: | $5.73 | ||
| Average Daily Volume: | 30,518 (past 90 days) |
TOP FIVE HOLDINGS AND PERCENTAGE WEIGHT
| Company Name | Ticker | % Weight | ||||
| Banco Santander Chile | BSAC | 9.89% | ||||
| S AC I Falabella | XSGO | 9.87% | ||||
| Enersis SA | ENI | 8.97% | ||||
| Empresas COPEC SA | COPEC | 8.75% | ||||
| Parque Arauco SA | PARAUCO | 6.02% | ||||
| 02/26/16 | ||||||
The Best For Last
$CH is an overlooked gem for income investors. It currently pays a 10.94% yield.
If you are looking for global exposure tied to commodity prices, where you can collect income while you’re waiting for China to catch its breath, The Aberdeen Chile Fund makes a lot of sense.
The ETF has recently recovered from five-year lows and is well positioned to regain lost ground.
In March 2012, this was a $19 ETF. Today, it trades below $6. This is an excellent opportunity to acquire shares at a low price and to collect a double digit yield while we wait for capital appreciation.
Trade Alert
Buy: The Aberdeen Chile Fund (NYSE: $CH) up to $6.25
Recent Price: $5.73
Price Target: $11.00
Stop Loss: $5.05
Sector Snapshots
Consumer Discretionary
Like most sectors, consumer discretionary stocks slogged through a brutal January. The sector more than made up for lost ground in February. Retail sales were up 0.2% in January. The top categories were cars and clothing.
For the month of February, our Market Vectors Retail ETF $RTH finished up 1.2%.
Buy up to $77.50.
Consumer Staples
Despite rising retail sales, where raw numbers are being driven by car and truck sales, consumers remain cautious. This is why we see the consumer staples category doing better than the discretionary stocks. Together, we expect these two sectors to balance one another and behave in a countercyclical fashion.
For the month of February, our Consumer Staples Select Sector SPDR $XLP finished up 1.0%.
Hold… the ETF is now trading above our buy price of $49.50.
Healthcare
Healthcare stocks suffered through a rugged January, but made up for most of the losses in February. But uncertainties over how the outcome of the U.S. Presidential election may impact the Affordable Health Care Act are holding back significant growth.
For the month of February, our iShares US Medical Devices ETF $IHI finished up 1.1%.
Buy up to $120.00.
Technology
Technology stocks are still on sale. The rebound we’ve seen in other sectors the past month hasn’t swept tech stocks off the floor, where sale prices are the norm. Cisco, for example, sells for 10x earnings and delivers a 4% yield.
For the month of February, our First Trust Dow Jones Internet Index Fund $FDN finished up 0.7%.
Buy up to $78.00.
Homebuilding
Homebuilding stocks are still battling headwinds. Investors are skeptical. Despite earnings growth and an increasing number of new starts, stock prices have been sagging.
For the month of February, our SPDR S&P Homebuilders ETF $XHB finished up 4.3%, the strongest performer in our portfolio.
Hold.
Utilities
Utilities stocks continue to do well. Over the past month, the broad index is up, and year to date, the sector is up 5.7%. We do not expect this pace to last, but we don’t anticipate any significant pullbacks.
For the month of February, our Utilities Select Sector SPDR $XLU finished up 0.5%.
Continue holding.
Portfolio Changes
- Buy Aberdeen Chile Fund, Inc. $CH up to $6.25
- Move Utilities Select Sector SPDR $XLU from Buy to Hold.
- Move SPDR S&P Homebuilders $XHB from Buy to Hold.
Category: SET Monthly Issues
