By Joseph Hogue CFA
The Argentine government seems to be borrowing from the Venezuelan playbook as of late, and investors would do well to continue the analogy in their analyses of possible investments in 2012, if not beyond.
Intervention in the currency market and a deepening loss of confidence in the peso has created multiple currency markets and expectations of further depreciation against the dollar.
To stem the depreciation and accompanying inflation, the country must sell its foreign reserves, which are low by regional standards. This is particularly important as Argentina, unlike Venezuela, is largely unable to raise funds through the bond market because of a default early in the decade and the lack of transparency in national data reporting.
Recent capital controls and a decree by the president that energy and mining companies repatriate their foreign earnings could negatively affect those key sectors’ ability to operate. Investors should watch closely for further governmental controls or outright nationalizations.
Additionally, an increasing interest rate environment to fight inflation could act as a headwind to financials. On a relative basis, the consumer sector should do well as consumers cut back on savings in the face of eroding purchasing power.
Investors should be extremely cautious with investments and may want to underweight the country relative to the region.