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Ptf Update: Don't Cry For Me (Over) Argentina

|Includes: AGRO, DESP, Grupo Financiero Galicia S.A. (GGAL), GLOB
Summary

Q1 Reduction in Argentina positions wasn't enough.

Stock picking partially spared OM in August collapse.

Argentina largely uninvestable until election; may be opportunity if Macri manages a shock comeback.

Argentina fell under the same thematic umbrella as the positions in Brazil, India and Vietnam; a relatively ‘young’ nation that had moved towards capitalism.

The position was originally a dislocation idea after the election of President Macri in late 2014 ended the long populist (and incompetent, etc.) rule of President Cristina Fernandez de Kirchner. While President Macri did a fine job of cultivating the low hanging fruit (independent Central Bank, removing capital controls, settling with bond holdouts, etc.), Argentina’s macroeconomic fragility meant he was always walking a fine line. His government’s management of the more complex reforms was far less impressive, and this combined with the weak macro conditions eventually forced the agreement of a $57bn deal with the IMF in 2018. This deal provided a much needed capital buffer for the country to stabilize the currency, but came with the IMF’s strict conditions (austerity!) leaving Macri with limited options to boost the economy. With an election rematch expected in late 2019, and Macri’s position weakening, OM reduced the position size in the first quarter of this year.

The second quarter saw surprises as new political alliances formed; firstly, Mrs. Kirchner decided to run as Vice President inviting her former Chief of Staff, Alberto Fernandez, to lead the ticket. Then, a third candidate Roberto Lavagna, a former Finance Minister under Mrs. Kirchner’s husband in the early 2000s, formed an alternative option to the polarized Marci-Kirchner battle. Finally, Macri shocked everyone by naming the Senate Majority (and Opposition) Leader, Miguel Pichetto as his VP candidate! With all the Presidential tickets announced, Macri’s position improved, Argentinean stocks rallied and OM hung around with his smaller position.

However, Macri suffered a huge defeat in the primary polling to get into the general election. Though Macri had no problem getting onto the general election ballot, trailing your opponent by 15 points and doing far worse than even the most pessimistic estimates doesn’t fill people with confidence. The market’s reaction made clear how little confidence…

Add in an 11% fall in the peso, and the S&P Merval fell 48% on the day; the second largest single day drop globally since 1950! For comparison, the Dow Jones dropped 22.6% on Black Monday in 1987! OM managed a pyrrhic victory, with the portfolio’s Argentinean exposure falling a mere ~26% on the day!

So what now?

Well, the uncertainty surrounding a Fernandez/Kirchner government makes Argentina uninvestable and hence OM exited his Argentinean positions. They certainly didn’t help in Q3, though since the start of 2016 Argentina has added ~400 basis points to performance. As for the future, if Macri should somehow overturn the long and increasing odds to get a second term, then perhaps the situation would be similar to the original dislocation opportunity in 2015.

The Argentina position was one that’s provided OM with many lessons. Initially, it helped spur the research that cemented the Dislocation strategies’ rule of typically holding 18-24 months (and 30 months maximum) from the narrative changing event (in this case Macri winning in late-2014). This time, it served as a reminder that emerging markets are never boring and the downside skew is always worse than you think! OM would have been better trimming on the IMF deal which reduced Macri’s degrees of freedom and exiting in full back in March. In both cases, the upside on a Macri victory was so great that missing the first 20-30% wouldn’t matter. Remind OM of that, if Vietnam, Brazil or India start to go off the rails…

Disclosure: I am/we are long GGAL.