Global Investing Hot Spots

Argentina's stock market is on a tear despite economic woes

Bryan Borzykowski, special to
The economic future for Argentina

Most Americans are likely focused on the looming U.S. election, but there's another vote that global investors should be paying close attention to. On Nov. 22, Argentina will choose its new leader, and markets are hoping that Buenos Aires Mayor Mauricio Macri, who many see as an economic reformer, will walk away the victor as the country's next president.

Until last weekend, most people didn't think that Marci, the opposition leader, had much of a chance. Daniel Scioli, a member of the governing Peronist party and the hand-picked successor to current president Cristina Fernandez de Kirchner, was expected to take the most votes in an Oct. 25 election, but at the end of the night, the two candidates were separated by less than two percentage points, prompting a November runoff.

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For long-suffering investors, this is good news. The Merval Buenos Aires Index has jumped by nearly 4 percent since the market opened on Monday, and if Macri wins, which many people now think is a real possibility, it could continue to climb higher.

But while the results came as a shock to many, just the fact that the current president can no longer lead the country — there are term limits in Argentina — has been a boon to the stock market. The index is up 36 percent year-to-date, making it the second-hottest market in the world, according to S&P Capital IQ.

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For the last 15 years, the once mighty Argentina has been an economic wasteland. In 2001 it defaulted on its debt, and ever since, its leaders have refused to pay its creditors — including some U.S hedge funds.

The nonpayment has meant the country can't borrow money from foreign governments, so it's essentially had to self-fund its own operations, said Alfredo Coutino, Moody's Analytics' economist for Latin America.

That has wreaked havoc on the country's economy and its stock markets.

"They couldn't access international capital, and no one wanted to put their money in Argentina," said Coutino. Those who do have investments in the region have had difficulty getting it out — capital controls have been put in place to stem outflows.

The government also implemented price controls to curb rapidly rising inflation and started nationalizing some energy, transportation and telecom companies. Huge deficits have been incurred, and the stock market barely budged for many years, added Coutino.

It's likely that no matter who wins, financial reforms will have to take place, said Chuck Knudsen, an emerging markets specialist at T. Rowe Price — its Institutional Frontier Markets Equity fund has a 10.3 percent weighting to the country, the most out of any U.S.-based fund, according to Lipper.

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However, if Macri is the new leader, changes will come much faster and be more pronounced than if Scioli wins, which will be better for the market in the immediate short term. Those who can be patient for three to five years, though, should see more meaningful equity gains in the region, regardless of who gets in power, he said.

Buying into Argentina

There are a number of ADRs on U.S. stock exchanges that investors can purchase. T. Rowe's Institutional Frontier Markets Equity fund holds Grupo Financiero Galicia S.A., a Buenos Aries-based bank that's listed on the Nasdaq. The banks are a good way to play the economic recovery, Knudsen said.

There are 29 U.S.-based mutual funds that hold Argentina stock, but only three hold between 8 percent and 10 percent in the country, and no fund holds more than 5.8 percent of Argentinian assets.

For a pure-play investment, buy the Global X Argentina ETF (ARGT), which holds 30 stocks. Some holdings are not based in the country, but a large percentage of their revenue is from Argentina.

Buyer beware: The ETF doesn't reflect the Merval index. About 40 percent of ARGT's holdings are in energy stocks, 20 percent in financials, 13 percent in information technology and 8 percent in consumer staples. While the country's main index is up by a lot, the ETF has climbed only by about 0.8 percent this year.

"There are long-term prospects here, even if Scioli is elected," Knudsen said. "The trend will be more positive, and some of the country's potential [will] be unleashed."

So what can investors expect from a new leader? Both Scioli and Macri have pledged to finally put an end to the country's default debacle. Whether they'll pay its debtors in full or renegotiate a new deal remains to be seen, but Jan Dehn, research director with Ashmore Group, an emerging markets-focused investment firm, is optimistic that something will happen.

When it does, the country will be able to regain access to international capital markets. It will then be able to borrow funds at far lower interest rates than it's borrowing at now, and that will have a positive effect on its own financial position. "It can become part of the global family again," said Dehn.

There's also hope that they'll denationalize some of the companies it now controls, relax foreign investment restrictions, better develop its large natural resources industry — it has the fourth-largest shale gas reserves on the planet — and, simply, "do the right thing," said Dehn.

There are long-term prospects here, even if Scioli is elected. The trend will be more positive, and some of the country's potential [will] be unleashed.
Chuck Knudsen
emerging markets specialist at T. Rowe Price

If it does reform its economy, then the market will surely rise higher. Some experts estimate that $120 billion of "flight capital" — Argentinian money that's been invested outside of the country — could return and get put into the domestic market, said Dehn.

"It may be a great fundamental story," he said.

Devaluation risks

Don't put your retirement savings in the country, though — the market is going to go through plenty of more ups and downs before it stabilizes. It's also possible the reforms don't happen as people expect them to, which would devastate the market.

One of the biggest concerns for Knudsen is a devaluation of its currency, which could happen if it opens up its economy. It's been artificially supporting the peso up until this point, but it won't continue to do that under a reformed economy, he said. That could hurt U.S. dollar investors, who will see their investment fall as the peso drops.

It will also have to reduce its deficit, and those debt payments could be significant. The new leader will likely have to reduce spending and, potentially, raise taxes on a struggling consumer, said Coutino.

For those who can see the bigger picture and don't mind volatility, gains should come. The economy is growing by less than 2 percent this year, but Coutino thinks GDP growth could accelerate to 3 percent next year and 4 percent in about three to five years.

Its large agriculture sector, along with banks and telecoms, will also benefit from reform and could be areas for stock-picking investors to buy into. Energy is a big sector, too, but gains there are also dependent on global commodity prices.

By Bryan Borzykowski, special to