Shift In Policy Leads To Recovery
Following an aggressive shift to what market analysts refer to as “orthodox policies”, Argentina now appears to be transitioning from a normalization phase to a broad-based recovery. Recent data shows growth across the country is slowly improving, inflation is falling and corporate profitability is steadily rising.
Now primed for a return to the MSCI Emerging Market Index, Argentine equities still offer some value. What was viewed as aggressive macro normalization by president Mauricio Macri’s administration led to a painful adjustment process, as markets expected. However pressures are now subsiding and the country’s recession is “likely ended in the fourth quarter of 2016”, New York-based fund manager Bienvielle Capital Management wrote in a note to clients this month. These factors and more, the firm says, have set the stage for Argentina’s economic growth in 2017.
Improvement Across Sectors
Agriculture continues to expand while manufacturing is now recovering. In addition, disinflation should begin to boost real incomes and consumption. Inflation in January declined to 1.3% m/m, lower than expected, yet the battle is not over. Hikes in regulated prices and upcoming wage negotiations are expected to keep the central bank vigilant, but inflation will continue to trend lower ultimately allow for easier financial conditions and rising credit, a positive for banks and consumers.
Currently, Argentina’s private sector is one of the most under-levered in the world, exhibiting an astonishingly low level of debt for a comparably highly educated workforce, so increased credit should underpin and lead to more growth over the medium term.
President Macri has and continues to take steps and carry out measures to solidify the country’s financing needs. For example, the introduced tax amnesty is expected to attract $130-140 billion of repatriated capital by the March 31st deadline. As FX reserves climb, Argentina is finding itself on a strong financial foundation.
As sentiment has improved, Argentine bonds and equities have rallied, narrowing the discount relative to emerging market and regional Latin American peers. And as the macro adjustments flow through the corporate sector, profits are expected to double in 2017.
Moving Forward, Stabilization Evident
Moody‘s Investors Service on March 6 changed the outlook on the government of Argentina‘s rating to positive from stable and affirmed the issuer rating at B3. Citing an “improved policy stance” and an expectation of faster economic growth, the agency is expecting a return to economic growth in 2017 and 2018.
“In its first year in power Argentina‘s Macri administration has successfully implemented policies meant to address some, but not all, of the major macroeconomic imbalances and microeconomic distortions it inherited,” Gabriel Torres, senior credit officer with Moody’s said. “This represents a major policy break with the prior government, and the positive outlook reflects Moody‘s view that the credit positive change in the overall policy stance will remain in effect at least during the current administration’s mandate which ends in 2019.”
Despite increased attention, it seems the broader investment community still under-appreciates the significance of the pending MSCI upgrade, specifically the amount of passive and active flows likely to result from it (relative to free float). Recently, asset management giant BlackRock announced a forthcoming iShares Argentina ETF. Once launched, such a product will make Argentine equities more accessible to retail investors.
Twelve years of heterodox policies under the Kirchner’s resulted in a dearth of IPOs; however, this should soon change. Investment banks anticipate a significant jump in equity and bond issuance in 2017 and beyond.
Argentina remains a highly undercapitalized economy.
This is the second in our series on Argentina’s first year under Macri.