Argentina's President Cristina Fernandez holds up a tube with a sample of the first oil extracted in the country, during her announcement of a bill to nationalize Spain's controlled oil company YPF, at Government House in Buenos Aires, Monday April 16, 2012. Fernandez said in an address to the country that the measure sent to congress on Monday is aimed at recovering the nation’s sovereignty over its hydrocarbon resources.Natacha Pisarenko/The Associated Press
Few other countries have a stock market as unpopular as Argentina's. The country has an abundance of natural wealth – but its political leaders are in dire need of an Economics 101 course when it comes to managing the economy. The good news is that their dirigiste policies appear to be on the way out, so a catalyst is in place for a revaluation of stocks.
How unloved are Argentine stocks? The market's capitalization was just 17 per cent of gross domestic product in 2013, reports brokerage firm Raymond James. This is way below the average of 49 per cent for countries in the Americas. Also, Argentina's cyclically adjusted price-earnings ratio is a mere 8.5. Only four countries have a lower ratio on Cambria Investment Management's list of 55 countries.
The first catalyst could arrive by July 30. That's the final day of the grace period U.S. courts have specified for Argentine officials to settle with U.S. hedge funds seeking payment on government bonds that went into default in 2001. Other major lenders have already accepted a debt restructuring, so a deal this month would open the door to international capital markets.
Access to foreign capital will help Argentina finance the development of the Vaca Muerta shale oil-and-gas fields, which are considered to be the largest in the world. It would also reduce reliance on central bank printing presses and tame an inflation rate now above 20 per cent a year.
The stabilization of inflation and development of natural resources can end, and even reverse, the downward spiral in the Argentine peso. A stronger currency will, in turn, make it more attractive for foreigners to invest in Argentina.
If a deal is not reached with the hedge funds this month, there could be a sell-off. But it should be a buying opportunity because a certain catalyst arrives in 2015: presidential elections. President Cristina Kirchner cannot run for a third term by law, so she will not participate. The top candidates to succeed her are pro-business and likely to move away from her policies.
Many Argentine companies trade on U.S. exchanges as American Depository Receipts. There is also an Argentina-focused ETF, the Global X FTSE Argentina 20 (ARGT). In mid-August, it will switch to a new index and trade under the name, Global X MSCI Argentina ETF.
Mercadolibre Inc. (20.9 per cent of the weighting in ARGT) is the Latin American equivalent of eBay Inc. Return on capital is above 30 per cent and there is plenty of room for earnings to grow given penetration levels are still far below those of developed countries.
Tenaris S.A. (20.1 per cent of the weighting in ARGT) is a manufacturer and distributor of steel pipe used in energy and industrial applications. The development of the Vaca Muerta shale deposit should generate a lot of business for Tenaris.