ARGT - Argentina's Investment Potential: 2 Key Factors To Consider

2023-12-22 07:21:37 ET

Summary

• Argentina's monetary problems, including high inflation and a weakening peso, pose significant risks for investors.
• The country's credit risk is also a concern, with ratings agencies predicting a potential default in the coming years.
• The market's optimism about Argentina's economic prospects is unwarranted given the current economic and political situation.
• MercadoLibre has carried the index in recent years, but may not continue to do so if the Argentine economy falters.

Introduction

Today, I read an article about tax-loss harvesting by my colleague Steven Cress. It had some interesting ideas in it, you can read it here .

In his article, Cress recommends adding exposure to Argentina's stock market via the Global X MSCI Argentina ETF (ARGT). His article offers several bullish comments, and you can read them via the link above, but I felt it was lacking in some political and fiscal context that gives me a very bearish impression of Argentina in a macro sense.

In this article, I will highlight two major risks and various concerns investors should consider. I consider ARGT a sell.

1. Monetary Risk, the Peso is in Peril

Argentina's monetary problems have

Inflation has been out of control. For investors who are used to reading about the US's inflation saga, brace yourselves.

Consumer Price Index

Current figures of consumer prices at 160% means the economy is in a crisis that it has never seen before. Prices are out of control and have shown no signs of stopping.

It's gotten bad enough that Al Jazeera is now reporting on Argentinian economic woes affecting mental health en masse .

Food has been one of the most adversely affected in terms of pricing, with its inflation up 183% as of last month.

Food Price Inflation

Interest rates have climbed dramatically this year, with a withdrawal from peak rates of 126% to 100%.

This really gives me some perspective when I write articles about parking my cash at 5.3% .

Central Bank Interest Rates

The Peso to Dollar is also not looking great, as the government recently devalued the Peso by 54% .

ARS to USD Value

This move has dramatically weakened the peso, but it has been on a down slide for some time.

This attempt to stimulate the markets will cause pain economic pain, which President Milei's regime has explicitly said is the plan ,

"We are going to be worse off than before for a few months, particularly in terms of inflation. And I say that because, as the president says, it is better to tell an uncomfortable truth than a comfortable lie,"

The money supply itself shows no sign of slowing down, which is a very bad sign for taming inflation.

This comes at a time when Argentina has hit a record in widespread poverty, with the current rate of Argentinians living below the poverty line at 40% .

Continued mistrust in the local currency has many Argentinians using USD as a more daily occurrence.

2. Credit Risk, the Country's Future is Very Uncertain

Fitch has Argentina's rating at CC. In a report justifying their rating, Fitch writes :

...a restructuring or other default event of some sort is more likely than not in the coming years. Avoiding this scenario will likely rely on a major build up in international reserves, which will be difficult given their weak starting point and challenges in the adjustment process. It is also likely to require recovery of market access, which could be even harder. The timeframe to achieve these conditions is short, given a hump in foreign-currency bond payments starting in 2025.

Due to the perceived credit risk by ratings agencies like Fitch, Argentina's sovereign bonds have been paying up to 18%.

Argentine bonds are now worth about $0.35 on the dollar on secondary markets, and that is actually a sign of strength compared to where they were last year and earlier this year.

The government has defaulted before, as recently as 2020 , but have come out of default territory and secured themselves an S&P Global upgrade to CCC- .

This does not absolve Argentina from the pressure of making its payments. It is still in the hole $44B to the IMF , and has been since 2020 .

An Underdog in Buenos Aires

President Javier Milei, whose party is the minority in the legislature , has been working on austerity measures like the devaluing and dollarization mentioned earlier. He recently proposed changing 300 rules and regulations aimed at deregulating the Argentinian markets.

He intends to cut government spending by 3% of GDP , which might not be something Argentinians will tolerate given the already abysmal state of the poverty rate and inflation rates.

"Shock therapy," as he's calling it, will not go well for the consumer of Argentina, who needs to be in a position of able and willing consumption if Argentinian business are to thrive.

Protests have already broken out , with thousands of people marching in the streets of Buenos Aires.

I will not get into the politics further, but this level of unrest should be noted for our understanding of the state of the Argentinian people and their current economic conditions.

The Market is too Optimistic

When you look at ARGT's chart, you'll see that the market has not been pricing in all of this turmoil that I've outlined.

I am generally bullish on emerging markets, but I see all the issues plaguing Argentina and I do not see a burgeoning economy ready to deliver on the expected growth.

This run up is mostly based around market sentiment that the new regime will deregulate the markets and allow for more private competition, freer trade, and less regulation.

Note that these policies also come with social components that have garnered the attention of human rights' advocates .

This sentiment is too optimistic given the current monetary situation in the country.

One of the primary reasons for the strength of ARGT is the inclusion of MercadoLibre Inc. ( MELI ), which catapulted the fund forward in the last five years and is now worth 21.69% of ARGT's NAV.

Below are the top five holdings of ARGT. Take note of the sheet difference between MELI and the rest. This does not bode well for the index as a whole, as it shows how much MELI has carried it in the last five years.

Conclusion

I consider Argentina's market too risky to invest in and would caution against investing in the ARGT index.

• Inflation has yet to be tamed, continuing at an unbridled pace
• Central bank rates and monetary manipulation like the devaluing of the Peso has not curbed inflation yet
• Credit risk is too great, and Argentina is no stranger to debt restructuring, IMF loans, and defaults

There are better options in the emerging markets sector that present with far less macroeconomic risk folks should consider, such as the iShares MSCI Brazil ETF ( EWZ )/Global X Brazil Active ETF ( BRAZ ), iShares MSCI Taiwan ETF ( EWT ), or the iShares MSCI Indonesia ETF ( EIDO ).

For further details see: