Unlike its neighbor Brazil, Argentina is mostly enjoying good news these days.
Indexer MSCI is expected to confirm next month that Argentina will be elevated from frontier to emerging market status some time in 2018, which should draw in a new group of eligible funds and other investors interested in more developed markets. Argentina has been on the rebound since center-right President Mauricio Macri took office in December 2015, ending 12 years of left-leaning rule under Cristina and Néstor Kirchner.
Macri has loosened currency restrictions and settled lawsuits with investors holding claims on defaulted government debt. This year Argentina’s gross domestic product is expected to expand 2.2%. Inflation remains a major challenge and could exceed 20% in 2017, according to the International Monetary Fund. But with 10-year Argentine treasury bonds yielding about 6.25%, investors have snapped up roughly $30 billion in new bonds issued, as Argentina returned to foreign capital markets for the first time since its 2001 default. As for stocks, the Global X MSCI Argentina exchange-traded fund (ticker: ARGT) is up 49% over the past 12 months.
Presuming the index reconstitution, and a healthy backdrop for emerging markets overall–commodity prices in a respectable trading range, no central bank surprises, no growth shocks from China or elsewhere–Argentina is a good bet among developing markets, says Sean Newman, a portfolio manager who helps oversee $1.7 billion in emerging market bond investments at Invesco. He wants to see more evidence that the government can achieve its fiscal deficit target of about 3.5% of GDP, down from 4.2% at the end of 2016, with legislative elections in October possibly slowing progress. But he likes Argentine government debt in dollars and pesos, and provincial and corporate debt.
ARGENTINA IS OUTSHINING BRAZIL, which last week was in the midst of yet-another major corruption inquiry after a recording was discovered that allegedly implicates President Michel Temer in a coverup scandal. Temer denied the allegations. Brazil is still trying to inch its way from a prolonged recession. The iShares MSCI Brazil Capped ETF (EWZ) tumbled more than 17% Thursday on the Temer news. But there was little contagion effect for Argentina, with its ETF down 3%.
The Argentine equity market is small but diverse: The underlying MSCI Argentina index of nine stocks encompasses 85% of the country’s equity universe. Online Latin American retailer MercadoLibre (MELI), with a market cap of $12 billion, and oil and gas exploration company YPF (YPF) with a market value of $9.5 billion, dominate. The stocks this year are up 76% and 49%, respectively.
A smaller and more entrepreneurial name in the index has had its struggles: Adecoagro (AGRO), with a market value of $1.4 billion, was co-founded by CEO Mariano Bosch to squeeze efficiencies from farmland it owns or leases in Argentina, Brazil, and Uruguay. Earnings, tied to sugar, corn, and beef cycles, have been elusive, but Bosch told Barron’s last week that the small 6% stock return this year is due mostly to the publicized selling by early investors, including George Soros. The stock is a bit pricey at roughly... (Read More)