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Madeco SA Financial Analysis

Madeco SA Financial Analysis

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Published by mthmchris
Financial Analysis for Madeco SA, a Chilean Manufacturer of Flexible Packaging and Non-Ferrous metals.
Financial Analysis for Madeco SA, a Chilean Manufacturer of Flexible Packaging and Non-Ferrous metals.

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Published by: mthmchris on Jul 29, 2009
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12/27/2012

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Investment Philosophy
I am a firm believer in looking at potential investments from a global macroframework. Mutual funds tend to be esoterically divided into such strategies as “USMid-cap Value” or “Emerging Markets Microcap Growth”; it is my opinion that withsuch a restricted potential asset base, it can be extremely difficult for a portfoliomanager to be able to extract alpha. Global Macro is a broader framework, whichdivides investing into a three tiered analysis: firstly, the manager decides whichcurrencies are likely to outperform. Secondly, the manager decides what assetclass can offer the best return in the said currency zone. And finally, an instrumentis picked within the asset class decided. It is commonly said that “60% of the returnon an equity investment is based upon the performance of the market as a whole,30% is based on the performance of the industry, and only 10% on stock pickingability”. Global Macro is a means to extract alpha from not only the final 10%, butalso by analyzing the former two. Yet I do not see Global Macro and Classical Value Investing as necessarilyincongruent strategies. Indeed, given the historical outperformance of ValueInvesting, it appears likely to me that a successful manager could perhaps blend thetwo strategies into a broader framework. It is from this perspective that Iapproached this analysis.
Macroeconomic Overview
It is often a difficult, some say impossible task, to predict currency fluctuations. Iagree while that attempting to guess short term fluctuations is often a fool’s game,the currency market has show some long term trends as well as historical dynamicswhich can be learned from.From a GBP perspective, I am very bearish on the USD, both in the medium and thelong term. In the medium term, it is likely that the recent surge in the value of theUSD is unsustainable. Due to the dollar’s role as the world’s reserve currency, US T-Bills are often seen as the world’s risk-free asset. Indeed, whenever a crisis hits(whether the 2008 crisis, the dot-com crash, or the Asian/LTCM financial crisis of 1997-98) investors throughout the world drop their risky assets and pile intoEurodollars. This dynamic is well known. Yet as the world reaches the light at theend of the proverbial tunnel, investors are likely to sell their Eurodollar holdings andstart investing again in risky assets. This will undoubtedly cause the value of theDollar to decline in the medium term.While I am also bearish on the USD in the long term, I am not as confidant aboutthis projection. In my estimation, the long term downward trend in the USD couldbe due to one of two reasons – what I call the “capital flows approach” versus the“financial innovation approach”. If the first hypothesis is correct, the dollar’s role asthe world’s reserve currency has built up massive macroeconomic imbalances whichare being slowly alleviated ever since the fall of the BrettonWoods scheme. In other
 
words, the USD’s role is being replaced, not necessarily by one specific currency,but by a basket of major currencies. It should be noted that the Pound Sterling, theworld’s reserve currency at the turn of the last century, has experienced an 80%reduction in value, top to bottom. So when one asks the question, “how low couldthe value of the USD fall?” the answer could be quite a bit.Alternatively, the steady decline of the value of the USD could also be due to thepast 30 years of financial innovation, reducing long term interest rates and thusraising risk tolerance. That theUSD is the world’s reserve currency – this dynamicmeans that for financial institutions all other currencies pose exchange rate risk. The fall in interest rates means that such institutions are more likely to take onexchange rate risk, and divest their USD holdings. If this hypothesis is correct, thelong term value of the USD could hold steady, as I doubt regulators will allow furtherfinancial innovation given the current political climate.Regardless, the risks are sufficient that a GBP investor should likely avoidUSDinvestments, at least in the medium term. Unfortunately, this also means that suchan investor should steer clear of currencies directly tied to the USD, such as theRMB, the HKD, or the BRL. If the investor simply must buy a security in one of thesecurrencies, the instrument must provide a sufficient margin of safety to cover thecost of hedging away the exchange rate risk. The currency zone decided upon for the sake of this analysis was the Chilean Peso,or CLP. The Chilean Peso has very little history of large current account deficits,usually runs large trade surpluses, and has an extremely well-governed fiscalsituation. Unlike many of their Latin American counterparts, over the past 10 yearsthe Chilean government has built up large surpluses, so the country is uniquelypositioned to provide a fiscal stimulus to respond to the current economic climate.
 
One risk factor, however, is inflation, which peaked at over 9% in 2008. Yet it is myopinion that this was largely caused by the speculative run-up in copper prices, of which Chile is a large exporter.Because of the current interest rate climate, equities were chosen as the targetasset class to invest in. In particular, I wanted to find a company in Chile that hadbeen
harmed 
by the recent run-up in copper prices. I figured that as Chile was alarge producer of copper, there surely had to be manufacturers in Chile that hadbeen squeezed by the recent price surge. I therefore started looking at

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