This is the third in a series of articles that takes a very fundamental macroeconomic sectoral flow analysis of the economies of key countries across the globe to see if the local stock market is worth investing in via exchange traded funds (ETFs). These funds are available to all investors even for non-residents or for those not able to trade on the stock market of that country directly.
In this article, we examine Argentine from a sectoral flow analysis perspective to see if the private sector, containing the local stock market, is getting the support it needs from the government and external sectors to continue its march upwards.
Details of the methodology employed to analyze these opportunities are available in the sectoral analysis section later in this article.
Which Countries are Doing Well?
The first port of call is the ETF page at Seeking Alpha (SA) and a look at country ETFs and how they are performing.
One notices from the list that:
Latin American countries head the list; what are they doing right?
No European countries head the list.
Only three "developed" countries are near the top of the list - New Zealand, Canada and Australia; what do they have in common?
The US is green and showing promise, though far down the list. Why?
Mexico, a Latin American country, is near the bottom. Why? What is it doing wrong?
All these questions and more will be addressed in forthcoming articles on a country-by-country basis from top to bottom.
Most countries on the list are in the red and are of no further interest, though we could learn from them what to avoid, as could their governments and politicians, but as investors, we will leave that to them.
The Global X MSCI Argentina ETF is the third fund on the list and has not performed even half so well as Peru or Brazil. This could mean though that there is some catching up to do with the neighbors.
Argentina is near the top of the SA ETF list, and Fitch provides a snapshot of the current fiscal situation:
"BMI View: Argentina's federal government fiscal deficit will narrow over the coming years, driven by tempered expenditure growth and lower debt servicing costs. Nonetheless, weak revenues and political opposition to expenditure cuts will underpin wide deficits over the next two years.
Argentina's fiscal deficit will begin narrowing in 2017, as expenditure growth is constrained, debt servicing costs trend lower and rebounding economic growth supports revenues. That said, we expect historically wide deficits over the coming two years due to weak revenue growth in 2016, political opposition to expenditure cuts and lingering costs associated with the country's economic adjustment. In light of weak revenue growth in H116, we have revised our forecast for a 4.2% of GDP deficit in 2016 to 5.3% of GDP. In 2017, we forecast a shortfall of 4.8%."
The government is running a spending deficit and expanding the economy and money supply. This is good news. On the flip side, there are plans to one day rein in the expenditure in which case, the economy faces contraction if the external sector cannot make good the difference.
The pleasing comment is that political opposition to expenditure cuts will underpin wide deficits over the next two years. One can expect at least two years of continued government expansion of the private sector. So the near to middle-term prospects look good from the government sector.
Argentina's private sector has a light headwind from a negative balance of trade draining it of cash as the chart below shows:
This negative balance of trade though is more an exception than a rule and can be expected to trend back into a positive balance. This will then see a private sector buoyed by both the government and external sector.
Argentina's balance of trade can be very strong as can be seen in the chart below:
The next section explains the logic behind this analysis.
Sectoral Analysis Methodology
Each nation state is composed of three essential components:
The private sector
The government sector
The external sector
The private sector comprises the people, business and community, and most importantly, the stock market. For the stock market to move upwards, this sector needs to be growing. This sector by itself is an engine for growth and innovation, however, only it needs income from one or both of the other two sectors to grow.
The government sector comprises the government with its judicial, legislative and regulatory power. Key for the stock market is that this sector can be both a source of funds for the private sector through spending and also a drain on funds through taxes. The government through its Treasury also sets the prevailing interest rate and provides the medium of exchange.
The external sector is trade with other countries. This sector can provide income from a positive trade balance, or it can drain funds from a negative trade balance.
For the stock market in the private sector to prosper and keep moving upwards, income is required to be put into the flow. Otherwise, the sector can only circulate existing funds, or is being drained of funds and is in decline.
The ideal situation is that the private sector has a net inflow of funds and is constantly growing, thus giving the stock market headroom within which to expand in value. For this to happen, one or both of the other sectors have to be adding funds to the circular flow of income.
This relationship can be expressed by the following formula:
Private Sector = Government Sector + External Sector
For the best investing outcome one looks for countries where the government sector and external sector are both in plus and trending upwards.
To provide a positive recommendation, I would like to see both the government sector and external sector net adding to the private sector, and this net add being expressed as a growing stock market.
In the case of Argentina, the private sector is getting support from an expansionary government sector. On the other hand, there is a negative balance of trade and this is for me reason enough to look for other investment opportunities where the private sector is receiving net adds from both the other sectors.
Argentina has huge foreign trade potential. Soon the balance of trade may turn positive (the historical norm) and then we will have the situation that meets our investment criteria in that all other sectors are net adding to the private sector and trending upwards leading the stock market to rise.
In the next article, we move away from South America and have a look at New Zealand.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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.