How do know you when an emerging market can no longer be considered emerging? When even a major earthquake doesn’t put cracks in its stock market. Chile’s main stock market index wavered no more than 3.5% in the aftermath of this past weekend’s disaster before quickly recovering, says Brent Arends of the Wall Street Journal. “If you blinked on Monday morning, you missed the ‘buying opportunity’ in Chilean stocks.”
As Arends points out, the resilience of the market is proof of the high regard in which Chile is held. Physical disasters usually devastate an emerging market as overseas investors rush to get their money out. But most investors seem quite content to leave their money in Chile.
The real risk to Chilean investors may not be the earthquake, but frothy stock prices. The index has boomed 60% over the past year and has nearly quadrupled over the past seven years. While the index trades at only 16 times forecast earnings, Arends points out that it is changing hands for 1.6 times sales and 2.5 times book value, both of which are rather rich valuations.
Freelance business journalist Ian McGugan blogs for the Financial Post.