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.
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 per cent 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 Mauricio Macri conspired to send the Argentine peso down 25 per cent against the US dollar year-to-date. As a result, the country lost billions of it reserves trying to defend the currency.
Doubts over the country's ability to pay off its debts have fanned fears over a potential default. However, unlike Venezuela, 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.
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 next year
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 per cent 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 says.
On the equities side, the stock market has performed impressively: the Merval Index in Buenos Aires is up 155 per cent since the start of 2016. In 2017, the MSCI Argentina Index appreciated by almost 75 per cent.
That rally has faltered this year, 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 because of political uncertainty. "Is that any better right now?" asks Brudenell.
More from Morningstar
• Make better investment decisions with Morningstar Premium | Free 4-week trial
David Brenchley is a reporter for Morningstar UK.
© 2018 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'class service' have been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. Please refer to our Financial Services Guide (FSG) for more information at www.morningstar.com.au/s/fsg.pdf. Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782 ("ASXO"). The article is current as at date of publication.