Is Argentina a risk worth taking ?
Argentina is a frontier market with an unpalatable tendency for suffering economic crises and political instability. But it is also one where risk-takers can reap rewards.
By Jude Webber | Financial Times #adp02
That is why, despite the warning signs of economic overheating and inflation expected to climb to around 30 per cent this year, institutional investors are finding appeal, especially in the fixed income market.
“I think the fundamental reason is valuations,” says Ricardo Maxit, chief executive of Copernico Capital Partners, a Latin American fund manager which in March launched an Argentine equity fund. “Valuations are very cheap.”
On paper, G20-member Argentina, Latin America’s third-biggest economy, has much going for it: it is one of the world’s biggest producers of food commodities, including soya and wheat, and as such is enjoying booming prices. Furthermore, it has put its 2001 default on nearly $100bn behind it with several years of strong growth – 9.2 per cent last year and a central bank forecast for 6.5 per cent this year. It has also restructured 92.4 per cent of its defaulted debt, though some $7bn in debts to western creditor nations in the Paris Club remain outstanding.
But market-unfriendly policies, capital controls, political intervention in key sectors such as energy, lax monetary and fiscal policies, discredited official inflation data and a populist government have marginalised Argentina, bracketing it, in investors’ minds, more with countries such as Venezuela than regional stars like Brazil, Chile, Peru or Colombia. Indeed, it was reclassified by MSCI as a frontier market in 2009.
“Argentina is a frontier market, but it’s not a frontier economy,” says Mr Maxit. “There has been tremendous progress at macro level, though of course political risks remain.”
Many Argentine companies have quite strong balance sheets, says Daniel Marx, a former finance secretary, but he notes the “zipcode effect – the same balance sheet in other places would have a much lower yield”. Mr Marx is executive director of Quantum Finanzas, which has recently signed alliances with US financial boutique Evercore Partners and G5 Advisors in Brazil.
Fixed income offers some of the biggest attractions, says Javier Salvucci, head of research at Silver Cloud, a financial services group in Argentina.
“Fixed income paper, especially sovereign debt, is yielding a rate that is more than attractive,” he says.
Argentina’s government wants to keep stoking economic growth and Cristina Fernández, the president, is expected to stand for re-election in October and to win comfortably, giving her scope to press ahead with an economic model she says is delivering jobs and prosperity. Despite looming problems, including taming inflation and reining in unsustainable state spending and subsidies, Argentina is not in danger of default and has been meeting bond payments.
But Argentine politics are rocky and the potential for an economic crash landing exists even if, as Claudio Maulhardt at Copernico notes, it is “very, very hard for Argentina to have serious problems if commodities prices remain at this level. You may see a depreciation of the peso, but that doesn’t mean a crisis”.
A 9 per cent yield on an Argentine bond due in 2017 “looks pretty attractive” when compared with a third of that level in the US, says Mr Salvucci. “The spread is 600 to 700 basis points, and the Boden 2015 bond [the first dollar-denominated government bond issued after the 2002 default] is also yielding above 8 per cent in dollars.”
To find similar returns among sovereigns in the region, “you have to go to Venezuela. The returns are well above those of Brazil, Uruguay and Colombia,” Mr Salvucci adds.
Mr Maxit sees high value in equities: companies are trading at a significant discount to regional peers and the main Merval index is close to its all-time high.
The government has, however, made waves in recent weeks with plans to boost state representation on the boards of a group of leading companies in which it inherited stakes when the government nationalised private pension funds in 2008, a move that was itself widely criticised for undermining capital markets in Argentina.
“The assets are cheap. The problem is that the climate is not very favourable. Unless you see a change in policies towards the private sector, it’s hard to see that value being so easily unlocked,” says Mr Maxit. “So the safest way to play is public sector debt.”
Could the current situation be summed up as ‘get in now, but don’t stay too long?’ Maybe, says Mr Marx. “Inflation might get worse, the situation might get more difficult and at some point there may be a correction, after which Argentina will be more normal and spreads on Argentine assets might narrow.”
He recommends “being selective and careful”, amid signs of growing appetite. While until recently most interest in Argentina came from Brazil, that is changing. Quantum recently advised the province of Neuquén on a structured notes issue and Mr Marx says “most interest came from the US”.
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