Barron’s | Argentina Makes Progress on Economic Reforms
Argentina under free-market reform President Mauricio Macri is attempting to reverse more than a decade of inward-looking leftist protectionism. Although inflation has proved tough to tame and growth hard to come by, there are definite signs of progress.
The country’s inflation rate is now expected to tumble from roughly 40% in 2016 to 20% this year and then to half that in 2018. Gross domestic product is forecast to expand by 2.7% in 2017, versus a decline of 1.9% last year, according to the World Bank.
And the government’s return to the international bond market was met with gusto after it resolved payments on defaulted debt in 2016, though Argentina’s debt rating remains in the junk category. Argentina now constitutes 3.4% of the J.P. Morgan Emerging Markets bond global diversified index, having raised $32 billion since April 2016. That excludes another $21 billion raised by companies and quasi-sovereign issuers. The country’s stocks remain in MSCI’s frontier category, but that hasn’t prevented the Global X MSCI Argentina exchange-traded fund (ticker: ARGT) from jumping 35% in 2017.
A key test of where Argentina is headed will come at election time in October. Leftist populist and former president, Cristina Fernández de Kirchner, is running for a seat in the Senate, opening the way for a possible presidential run in 2019. The push away from socialism, however, appears inexorable.
Dallas-based hedge fund manager Highland Capital Management is all in with the change. The firm was one of the largest investors in defaulted Argentine debt and profited from its eventual repayment. Highland last year expanded its provincial debt and equity holdings and this summer purchased a hedge fund with an estimated $80 million in Argentine equity and debt assets. We recently chatted with Mauro Staltari, a Highland analyst covering Latin America, who believes Argentina’s stocks have more room to run as the country catches up with its Latin American peers.
“Argentina is the trade of the decade, and it has just begun,” says Staltari of his home country.
STALTARI FAVORS DOLLAR-DENOMINATED bonds in provinces aligned with the government. In equities, some of his picks are up more than 50% in U.S. trading this year. But he still favors financials in light of low consumer credit penetration and declines in inflation, and he likes utilities as tariffs gradually move toward market prices and improve profitability.
Among his picks are Banco Macro (BMA) and Grupo Supervielle (SUPV), which should benefit from improved loan demand. He also likes BBVA Banco Frances (BFR), which has underperformed peers, and has “room to improve.” Staltari recommends utilities Transportadora Gas del Sur (TGS) and Empresa Distribuidora y Comercializador Norte(EDN), as well as Pampa (PAM), an integrated electricity and oil and gas producer.
Buyer beware: The government’s slow pace of fiscal consolidation means elevated financing needs over the next two years, and that makes markets vulnerable to a reversal in capital flows, says Bank of America Merrill Lunch credit strategist Sebastian Rondeau. Nomura Securities fixed income strategist Siobhan Morden tells Barron’s, “I’m conflicted. I see tight credit spreads and a lot of issuance. But demand has compensated. So far.”