(Bloomberg) – In the volatile world of emerging market investing, a highly profitable, regulated water company from a traditional safe haven nation should be the safest investment possible. Tell that to the shareholders of Chile’s Aguas Andinas SA.
In just two weeks, shares in the Santiago sanitation company fell 30%, the steepest drop among 2,248 developing market stocks on an S&P index.
This is the latest chapter in a story that began almost two years ago when social unrest broke out in Chile. However, the liquidation soared this month when the ruling right-wing coalition was defeated in the election of the constituent convention that will be in charge of drafting the new constitution. That left the company in the crosshairs of a push to use the new charter to return essential services, including water, into the public domain.
Regulatory uncertainty is kryptonite for a stock whose appeal is stable margins and dividends based on regulated returns. Several members of the new assembly are focused on water reform, such as raising service quality requirements and restricting the right to cut services. Some even want to challenge private concessions at a time when drought and climate change are fueling demands for new regulations on natural resources.
In the two decades prior to the outbreak of street protests in October 2019, Aguas Andinas shares had risen more than 200%, on a par with other water companies globally.
Sold by the state in 1999 to the French company Suez and the Agbar Group, the sanitation company made significant investments and had coverage similar to that of a developed country. However, it is now at the center of a backlash against neoliberal policies dating back to the military dictatorship of Augusto Pinochet that ended in 1990.
Since the 2019 protests, the stock has plunged more than 60%, by far the worst performance among global water peers, with half of that loss occurring in the past two weeks.
In response to questions, Aguas Andinas said that it is essential to prioritize human consumption and access to reliable water and sanitation services, which is why it continues to strengthen the infrastructure and water security of Santiago.
The Santiago-based company said it is confident that the necessary framework will be maintained in Chile to face the great threat posed by climate change and its consequences.
While the cost of possible changes to the rules governing water rights could be passed on to customers, Aguas Andinas could face a reduction to its minimum guaranteed return on assets to just 5% from a current 7%, according to Jorge Carrasco, analyst at BCI Corredor de Bolsa.
The analyst said that he estimates that the share price will continue to be under pressure, until the tone of the new Constitution is outlined.
Original Note: A Safe Bet on Water Turns Into Biggest Loser in Emerging Markets
More stories like this are available on bloomberg.com
Subscribe now to stay ahead with the most trusted business news source.
© 2021 Bloomberg LP