Argentina: Why This Time May Be Different

by: Roca Sur Capital


Argentina has earned a bad reputation in financial markets after several sovereign debt defaults over the last few decades.

Continuous economic and political mismanagement have been the cause of these repeated disasters.

A new business friendly Government plans to change things for good. Will it succeed?

We introduce the investment alternatives available for US investors interested in Argentina.

Back in April 2015, we wrote about what lied ahead for Argentina, the third biggest economy in Latin America that had been an outcast from global markets since its last sovereign debt default in 2001. In our article, we suggested that three political scenarios were in sight, with more business friendly candidates Mauricio Macri and Sergio Massa with fewer chances of winning the National Election than ruling party's candidate Daniel Scioli. We suggested that Macri and Massa would obviously be a better option for the economy and financial markets, but we were not optimistic about their chances.

In November, however, Mauricio Macri was elected President in a historical election. Mr. Macri's party won all of the country's important districts, defeating the Peronist Party for the first time in history in its home ground of Buenos Aires Province. This election was a game changer in many senses and local financial markets soared with the news, with local index MERVAL rising over 40% between October (when first round elections gave Macri the lead) and December (when he was finally elected). Much of these gains were lost in late December and early January as the combination of emerging markets meltdown and unpleasant but much needed economic measures brought investors back to short term views.

Track Record

We have stated that economic mismanagement has been the main cause of Argentina's financial disasters over the last decades. Mismanagement has prevented the country from exploiting its vast array of natural and human resources. Some investors in Argentina and specialized managers in Wall Street believe this time may be different, as the new administration has announced plans to normalize the economy and its members have a very strong track record for execution.

The son of one of Argentina's wealthiest businessman, Mr. Macri first high profile job was as a President of Boca Juniors, one of Latin Americas top football clubs and one of Argentina's most valuable brands. Mr. Macri took over an almost bankrupt institution with very poor results and in 8 years turned it into one of the world's most respected football brands. Under his management, Boca Juniors became world football champions in 2000 and 2003, beating heavyweights Real Madrid and AC Milan.

In 2007, Mr. Macri was elected as mayor of Buenos Aires City, Argentina's Capital and ruled for two consecutive terms, being reelected in 2011. Under his management, the city undertook several infrastructure projects which were funded with budget surpluses and debt. With Argentina's federal government banned from issuing debt in international markets, Buenos Aires had a better debt rating than its federal counterpart for much of the last decade. Mr. Macri's tenure as BA mayor landed him at spot a the presidential race.

Helping Mr. Macri solve Argentina's economic puzzles is Alfonso Prat Gay, a former J.P. Morgan (NYSE:JPM) economist and investment banker who served as President of Argentina's Central Bank from 2002 to 2004 and was in charge of managing the aftermath of the country's debt default and economic collapse of 2001. As head of the Central Bank, Mr. Prat Gay managed to lower inflation from 40% to 5% in two years. He leads a team of US schooled and trained professionals.

First Steps in The Right Direction

Almost two months into the new administration, the Government has managed to solve some of the most urgent economic puzzles.

In December, Mr. Prat Gay swiftly announced the end of the foreign currency controls that had been in place since 2011 and had had disastrous effects on the economy (we wrote about them here). Surprisingly, after individuals and business were allowed to freely buy foreign currency for the first time in four years, the Argentina Peso soared, reflecting strong confidence in the new administration.

Dwindling foreign currency reserves, which had been another major issue, are also being addressed. Last week, a consortium of global banks including JP Morgan (JPM), HSBC (NYSE:HSBC), Santander (NYSE:SAN), BBVA (NYSE:BBVA), Deutsche Bank (NYSE:DB) and UBS (NYSE:UBS) signed a $5B credit facility with Argentina's Central Bank.

Regarding Argentina's ongoing dispute with a group of US based hedge funds in relation with 2001 defaulted bonds, which has prevented the country from tapping global markets for more than a decade, Government officials expect to reach a deal in the short term and Mr. Macri has publicly pledged to do so. This will most likely affect Argentina's credit ratings, with a significant upside potential in sovereign bonds.

Investment Alternatives

Having being an outcast from global financial markets for more than a decade, there are not that many tools for investing in Argentinean assets for global investors. There is no liquid ETF tracking the Argentinean stock index, but there are thirteen Argentina based companies trading in US markets through ADRs and two companies doing so directly:

- Banco Frances (NYSE:BFR) - Banking

- Banco Macro (NYSE:BMA) - Banking

- Cresud (NASDAQ:CRESY) - Agriculture and Food

- Edenor (NYSE:EDN) - Utilities

- Banco Galicia (NASDAQ:GGAL) - Banking

- IRSA (NYSE:IRS) - Real Estate

- Pampa Energia (NYSE:PAM) - Energy and Utilities

- Petrobras Argentina (NYSE:PZE) - Oil and Gas

- Telecom Argentina (NYSE:TEO) - Telecommunications

- Tenaris (NYSE:TS) - Industrial

- Ternium (NYSE:TX) - Industrial

- TGS (NYSE:TGS) - Gas

- YPF (NYSE:YPF) - Oil and Gas

- Mercadolibre (NASDAQ:MELI) - E-commerce

- Globant (NYSE:GLOB) - Technology

In a series of articles over the next weeks, we will introduce each of these companies to US investors that most probably never heard of them due to lack of coverage from US research firms and analysts, with a fundamental analysis of each and our fact based conclusion regarding their investment merit.

Disclosure: I am/we are long YPF, TEO, BMA, GGAL, BFR.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.