Argentina’s debt crisis is causing
the world’s biggest stock gains as investors buy equities to
protect themselves against peso devaluation and soaring inflation.
The benchmark Merval index has bounced 85 percent this year in peso terms after stocks surged in August following the country’s second default in 13 years on July 30. While that’s the greatest return among 92 global indexes tracked by Bloomberg, the gain shrinks to 43 percent in dollar terms when using the official exchange rate and 27 percent at the unofficial rate investors use to skirt currency controls.
While inflation accelerates to about 38 percent, the domestic market is getting a leg up as the peso heads for its worst year in more than a decade. Stocks offer protection from the weakening currency and an opportunity for investors to get around government limits on dollar purchases by buying Argentine assets locally and then selling them abroad for dollars, a practice called the blue-chip swap.
“Buying shares means you’re buying real assets - local companies with earnings that rise in line with inflation,” Christian Reos, the head of research at Allaria Ledesma & Cia., a Buenos Aires brokerage, said in a telephone interview.
The Merval stock gauge only falls behind Dubai’s DFM General Index among global indexes tracked by Bloomberg when calculated using dollar returns at the official rate. The Argentine peso has weakened 22 percent this year, the most in the world after the currencies of Ghana and Ukraine.
Blocked Payment
In July a U.S. judge blocked Argentina’s $539 million interest payment after President Cristina Fernandez de Kirchner refused to comply with his orders to pay holders of bonds from the country’s 2001 default in full at the same time. This year’s default has stoked dollar demand as Argentines wager the peso will weaken further as central bank reserves decline. Argentines are also buying stocks as a bet that company valuations will boost if the country settles with its creditors, according to Allaria Ledesma & Cia.
Argentine share prices are cheaper relative to their earnings than peers. The Merval index of 13 Argentine shares has an average price-to-earnings ratio of 12.1, while Latin America’s biggest indexes, including Brazil’s Ibovespa and Colombia’s Colcap, have ratios that surpass 18.
“Shares have room to more than double in price because they’re so ridiculously cheap now,” Reos said.
All of the index’s shares have climbed this year in peso terms, with Empresa Distribuidora y Comercializadora Norte SA, a power distributor, more than tripling on speculation the government will increase capped electricity rates. Tenaris SA, the steelmaker, rose the least, with a 47 percent increase.
Pressured Peso
The peso fell at the fastest pace in seven months in August after the default as exports slowed, reserves fell and demand for dollars increased from Argentines. The Merval jumped 20 percent last month.
Foreigners who want to invest in Argentine stocks with returns in dollars outside of the country can buy American depositary receipts. Investors can move back and forth between peso and dollar securities using the blue-chip swap.
The peso rate implied in that transaction is about 12.8 per dollar, according to a Bloomberg index of eight local shares and ADRs, or 35 percent weaker than the official rate.
Global X MSCI Argentina (ARGT), an Argentina-focused exchange-traded fund, composed of 28 ADRs, gained 6.5 percent this year, compared with 8.4 percent for the Standard & Poor’s 500 Index.
“Most foreigners invest only in ADRs,” Reos said. “They’ll be more willing to come to the local market as soon as the debt situation gets resolved.”
