(Bloomberg) -- The stellar start to the year for Chilean assets now hangs in the balance, dependent on one announcement by President-elect Gabriel Boric on Friday -- his finance minister.

Investors and traders have been bandying around names for the person to head economic policy for weeks, including the current central bank President Mario Marcel and former regulators such as Guillermo Larrain. For all the talk though, none are any the wiser on Boric’s cabinet choices.

Still, optimism is mounting that the former student leader, backed by the Communist Party, will name a fiscally prudent finance minister after toning down his more left-wing rhetoric since winning the election on Dec. 19. The Chilean peso is the best performing major currency in the world this year, gaining 5.2%, while the benchmark IPSA stock index has rallied 9.2% in dollars.

“Some think that Mario Marcel has a good chance,” said Felipe Alarcon, chief economist at Euroamerica. “That would be incredible. The market would celebrate a name like that a lot.”

Alarcon was one of three guests to Bloomberg News’s last “Chile Market Chat.” The other guests were:

  • Carolina Ratto, head of equity research at Credicorp Capital
  • Daniel Soto, head of investment strategy at SURA Asset Management

“We’ll continue seeing good results in local assets as long as all this moderation in Boric’s speech materializes in the cabinet,” Soto said. 

It’s easy to see why Marcel, 62, would be popular with the market. He has been central bank president since 2016 and a board member since 2015. Prior to joining the monetary authority, he was the government’s budget director and also worked at the World Bank.

While Marcel is close to the Socialist Party, he is also a harsh critic of early pension fund withdrawals that are despised by markets, and has supported the bank’s autonomy as Chile drafts a new constitution. He holds a master’s degree in economics from Cambridge University.

While many local investors are in a position of “wait and see” over the cabinet, foreigners have already started buying assets, Ratto said. 

“Many abroad are wondering if Chile will be like Peru, where the market was very negative with the election of president Pedro Castillo and had a strong recovery when Castillo’s reforms were stalled by congress,” Ratto said. 

Other Key Points

Investment strategy: 

  • “We are in a very cautious strategy, we try to pick stocks that are not too impacted by news on the regulatory front,” Ratto said. Credicorp likes the retail sector, prioritizing Cencosud’s stocks.
  • “There is a real possibility that the peso continues gaining, crossing the barrier of 800 per dollar, especially if the strong demand for the local currency from non-residents continues,” Alarcon said.
  • Local stocks are cheap as they were overly punished during the election campaign, but other factors such as monetary and fiscal policy, a possible economic recession, and the constitutional convention has Sura with a “neutral” position on the Ipsa, Soto said.
    • Local fixed income should have a better year than 2021, with positive returns, “due to fewer probabilities of pension fund withdrawals, and considering that bonds remain below their fair value,” according to Soto.

Constitutional Convention:

  • All three agreed that the body in charge of re-writing the nation’s constitution is set to fuel uncertainty this year
  • “What has given the market some peace of mind is a balanced congress, and if the convention attempts to change that, to call for a new congressional election in a reformed political system, that would be the worst scenario of all,” Ratto said
  • Alarcon sees a fairly broad consensus over the central bank’s autonomy within the convention, but remains worried about a potential change to a unicameral congress
  • Sura is following closely how far the convention goes with environmental initiatives. “There is a sort of ‘ecological radicalism’ that could lead to a setback in foreign direct investment, hitting growth.”

Risks on the international front: 

  • The risk with the Fed is that it becomes even more hawkish than policy makers have indicated in the past few weeks, according to the three analysts
  • Further bottlenecks caused by China’s strict policy against Covid could trigger a global slowdown and catch the Fed in the middle of a rate hike, Alarcon said
  • If Brazil does poorly, that affects all of Latam, because emerging market funds’ allocation depends a lot on Brazil, with the potential to restrict flows to the rest of the region, Ratto said

©2022 Bloomberg L.P.