Investors Positive on Argentina Despite Political Climate

Both equity and fixed income fund managers like Argentina despite its recent struggles. But an upgrade to emerging market status from MSCI is not guaranteed

David Brenchley 13 June, 2018 | 2:38PM

This article is part of Your Guide to Emerging Markets. All this week, we are focusing on emerging markets, sharing their potential pitfalls – and where you can make a pretty penny.

Argentina, bail out, imf, emerging markets, frontier markets, msci

This time next week, MSCI will decide on whether to upgrade Argentina from frontier market to emerging market status.

According to June’s fund manager survey from Bank of America Merrill Lynch, 56% of Latin American investors believe Argentina should be included in the emerging market index. Ashmore’s Andrew Brudenell agrees, saying that it “ticks all the boxes” for inclusion.

However, things aren’t that simple. A number of policy mistakes by the Central Bank of Argentina as well as slower-than-expected reforms by President Macri conspired to send the Argentine peso down 25% against the US dollar year-to-date. As a result, the country lost billions of it reserves trying to defend the currency.

With fears over the country’s ability to pay off its debts, fears over a potential default abounded. However, unlike Venezuela, the Argentina’s Government went to the IMF for help and succeeded in getting a bailout to the tune of $50 billion. That was larger than most had expected it to be.

Alexandro Arevalo, fund manager on Jupiter’s emerging markets debt team, says this took the market by surprise. Arevalo says the IMF is “a bad word” in Argentina, because many blame the Fund for the recession they have recently come out of.

But Arevalo thinks Argentina is now “taking the right steps” by going to the IMF, while Kaan Nazli, emerging market debt economist at Neuberger Berman, likes the speed at which the country has taken them.

Macri Faces Tough Election in 2019

The political side remains a problem, though. Macri’s popularity has waned; having been a shoo-in for re-election next year he now has a challenging campaign ahead of him.

Arevalo says he’s added to his position in Argentina – a 6% yield for a bond maturing in January 2019 backed by IMF funding is attractive. Meanwhile Nazli says he’s also positive on Argentina from a hard currency perspective.

Brudenell says the IMF support is “vital” and while policy makers have clearly made some mistakes, they are definitely better than the policy makers of old. “They needed a package and they got an enormous one. There’s clearly an enormous amount of economic support to ensure that Argentina can get things right,” he explains.

On the equities side, the stock market has performed impressively, with the Merval Index in Buenos Aires up 155% since the start of 2016. In 2017, the MSCI Argentina Index appreciated by almost 75%.

That rally has faltered in 2018, like most markets around the globe. However, Brudenell notes that it came from a very low base when the economy was in bad shape, as was major trading partner Brazil. Therefore, he thinks there’s more to come.

The depreciated currency will help trade, benefiting some companies, while credit demand is still there, which should help the banking sector.

So, will MSCI upgrade Argentina? “Technically, it ticks all the boxes,” adds Brudenell. The problem is, MSCI is a private enterprise so, while it has some rules, it makes final decisions at its own discretion.

Last time Argentina was considered for emerging market status, they were rejected due to political uncertainty. “Is that any better right now?” asks Brudenell.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

About Author David Brenchley

David Brenchley  is a Reporter for Morningstar.co.uk