In a previous article written last April, I argued that while I was concerned of the longer-term economic growth prospects for Argentina; I envisaged very little probability of a stock market contraction as investor interest would continue to grow up till the elections at the end of October.
However, it appears that we have indeed seen a contraction in the Merval, with the index dropping from a level of 12344 at the end of April to a low of 10800 at the end of May. On a cumulative basis, the contraction was the largest seen since the end of 2014. In this regard, is it possible that the recent run-up in stock market activity is drawing to a close?
On June 1, Bloomberg had reported that Argentina is currently accumulating debt at a faster rate than during the 2001-02 crisis, with a deficit of 17.4 billion pesos greatly eclipsing the 3.6 billion peso surplus at the same period last year. While the Argentinean economy is in a better shape than it was thirteen years ago, long-term growth could still be under threat given that revenue from a previous commodity boom is now coming to a close. Given that the Argentinean government must now contend with lost revenues from the same, larger debt levels are required to fund government spending.
On the other hand, the World Bank reports that growth prospects for Argentina are optimistic, forecasted at 1.1 percent this year, followed by 1.8 percent in 2016 and 3 percent in 2017. Among the reasons given for the positive forecast, one of the main ones is that Argentina is set to regain access to capital markets in 2017. However, there is the risk that such a forecast may be overly optimistic. Should commodity prices fail to recover, then a bloating of government debt could lead to a situation where the world economy once again loses confidence in Argentina to meet its obligations.
So, where does this leave the country's stock market? In the short term, I see it as unlikely that the market will be driven solely by fundamentals, and significant speculation will persist as the country's elections draw ever nearer. While the market may be bid up in the hope that a new government will lead effective economic reforms, there is still a risk that commodity prices may not recover, an issue which lies largely outside of government control. In fact, with the possibility of an increase in soy supply from Argentina after the elections, this may promote economic growth by allowing Argentinean farmers to increase sales. However, this could also have the effect of drastically reducing prices as a result of greater supply, which would still impede economic growth and this would transfer to Argentina's stock markets.
Argentina is quite a risk right now, so much so that I am not ashamed to admit I simply cannot forecast where the market will trade next as a result of the uncertainty surrounding Argentina's economy. The markets are being driven primarily by speculation rather than macroeconomic fundamentals, and investors betting on Argentina are truly putting all their money on red at this point in time. In this regard, from an investing standpoint I would be inclined to go short on the Argentinean markets via ETF at this point in time.
However, given significant volatility and uncertainty regarding future movements I would do so by means of a short limit order. For instance, the Global X MSCI Argentina ETF (NYSEARCA:ARGT) has been on an uptrend from a level of 18 at the beginning of 2015, having reached a peak of just above 22.5 at the end of April before declining to a level of 21.21. In this context, I see a dip below the 20 level as potentially being a good point to initiate a short position.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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