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Go back a century and a very popular phrase was “rich like Argentina.” That’s because Argentina was one of the 10 richest countries on Earth. Its future looked bright.
But then inept governments happened. A litany of military dictatorships, the populism that was Peronism and a number of inept rulers brought Argentina to its knees – the latest being ousted socialist President Cristina Fernández.
Finally, the Argentine people had had enough. They elected center-right former Buenos Aires mayor Mauricio Macri as president.
Market-friendly Macri, who was sworn in on Dec. 10, is the breath of fresh air the country needs. He is moving quickly forward with his reform agenda.
Argentina Open to Markets
One of the first items Macri dealt with was the settlement of the long dispute surrounding non-payment to bondholders on some Argentina bonds. Macri quickly came to terms with the group of hedge funds headed by Paul Singer’s Elliot Management.
That default had effectively kept the country shut out of the global capital markets for the past 15 years. But no longer.
Argentina was welcomed back with open arms. Its recent $16.5 billion global debt offering was the largest emerging-market debt sale ever. And yet there were $70 billion of orders received for the batch of Argentine bonds.
That made the offering a smashing success, no doubt in large part due the relative high yields. For example, the yield on the 10-year bond was a juicy 7.5%. Investors clamoring for this issue pushed the price up in the secondary market. The market yield on it quickly dropped to 7% as prices rose.
Argentina also sold bonds with three-, five- and 30-year maturities.
What a Mess
Investors buying these bonds are taking a real leap of faith that Macri and Finance Minister Alfonso Prat-Gay can turn the country around. When Prat-Gay was Argentina’s central banker, he was known as a “magician.” He and Macri will need to be magicians.
That’s because the previous Fernández administration left behind what could be politely called an economic disaster.
Inflation may run at 35% this year. Currency reserves are depleted. The budget deficit will hit about 7% of gross domestic product in 2016. And the economy will for certain be in recession this year.
It’s so bad that Standard & Poor’s does not see Argentina’s GDP, measured in dollar terms, hitting 2015’s level again until 2019.
Besides the bond deal, Macri and his finance minister have hit the ground running with reforms.
Income taxes were cut and aid was increased to the elderly and families with children. The poverty rate in the country is around 30% and may rise further. However, subsidies for citizens on electric, water, gas and transport have been reduced.
And importantly, Macri allowed the currency – the Argentine peso – to float freely. All capital controls were lifted. Interest rates were also raised.
Source: Financial Times
The currency moves and the removal of export restrictions allowed Argentina’s agriculture sector to be competitive once again. Argentina is the world’s No. 3 exporter of soybeans and No. 1 exporter of soymeal, which is used in animal feed.
Argentine Stocks
Macri’s reforms are starting to draw in big-monied investors, including George Soros and Daniel Loeb.
I’m a believer too in this market-friendly administration. What’s the best way for the average U.S. investor to put money to work in Argentina?
There is an exchange-traded fund – the Global X MSCI Argentina ETF (NYSEArca: ARGT). I’m not a fan though. Nearly 17% of the portfolio is in Tenaris SA (NYSE: TS), a leading supplier of metal tubes and related services to the energy industry.
I’d rather pick individual stocks.
If one wants energy exposure, there is YPF SA (NYSE: YPF). Thanks to a new government subsidy, it will be exporting oil for the first time in two years. And its Vaca Muerta shale deposit is one of the world’s largest reservoirs of both shale gas and shale oil.
In agriculture, there is Adecoagro (NYSE: AGRO). This company owns farmland in both Argentina and Brazil. George Soros is the biggest shareholder in the company.
I would also consider the banking sector. Moody’s, in November, upgraded the outlook on Argentina’s financial institutions from negative to stable.
Three Argentine bank stocks trade here in the United States: Grupo Financiero Galicia SA (NASDAQ: GGAL), Banco Macro SA (NYSE: BMA) and BBVA Banco Francés SA (NYSE: BFR).
Of the three, my choice is BBVA Banco Francés. Its history dates back to 1886 and is 76% owned by Spanish banking giant Banco Bilbao Vizcaya Argentaria SA (NYSE: BBVA).
These Argentine stocks will benefit if Macri and Prat-Gay can work some economic magic.
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