How To Play Argentina's Supreme Court Setback

Includes: ARGT, TS, YPF
by: Charles Lewis Sizemore, CFA

You could write a morality play about Argentina's debt woes. A vengeful market has never forgiven the country's original sin of debt default in 2002. Argentina spent years running away from its debts, even running to the likes of the late Hugo Chavez for funding. The country restructured about 93% of its bonds in 2005 and 2010, but a group of "holdouts" has pursued the remainder with the zeal that Inspector Javert pursued poor Jean Valjean, going so far as to force the impounding of an Argentine navy ship in Ghana two years ago.

Not that I feel sorry for Argentina, of course. The country got itself into this mess by borrowing too much money and then arrogantly refusing to pay it back. Argentina has also pursued a range of disastrous anti-market policies over the past decade, has made a habit of expropriating foreign assets (as was the case when it effectively stole Repsol's YPF (NYSE:YPF) stake), and has even contributed to the soaring world price of beef by restricting exports in a boneheaded attempt to contain inflation.

But the U.S. Supreme Court decision on June 16 to let stand a lower court ruling that would require Argentina to make its holdout creditors whole or effectively be restricted from the global financial system is potentially bringing this morality play to an end. Without some sort of deal, Argentina faces another default at the end of this month, as it lacks the cash to make the holdouts whole and pay its other bondholders.

NML Capital, the hedge fund leading the holdouts, said Thursday it is ready to negotiate, and Argentina's government indicated Wednesday that it was prepared to send representatives to New York.

Argentina seems to be in a deal-making mood these days. Argentina settled its dispute with Repsol in April and settled with the "Paris Club" of sovereign lenders in May. The hedge fund vultures are the last impediment to Argentina being a "normal" country again, or as normal as a country with Argentina's history can ever hope to be.

I expect capital to start flowing back into Argentina this year, as a settlement will remove much of the uncertainty that has made investment all but impossible.

So, how do we play Argentina's return to polite society?

One option is via the Global X FTSE Argentina 20 ETF (NYSEARCA:ARGT), a basic of liquid Argentine stocks. ARGT is heavily weighted in international oil and gas pipeline maker Tenaris (NYSE:TS) and in state oil company YPF (YPF), at 20% and 13% of the portfolio, respectively.

I'm ok with that. I expect most of the investment flowing into the country to go straight to the energy sector.

Action to take: Buy ARGT and expect to hold for 12-18 months for 30%-75% gains. Use a 15% trailing stop as risk management.

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