Argentina's return to MSCI EM index seen as a sure thing
NEW YORK - 07:02 EDT, 19 June 2017
Argentina's benchmark Merval stock index has risen 24 percent year-to-date and has more than doubled from its January 2016 low. Some fund managers believe the expected MSCI upgrade has been largely behind the surge.
"The underlying story on the macro front is hardly compelling," said Tina Byles Williams, founder and chief executive of asset manager FIS Group. "So if you take out the euphoria around the MSCI inclusion there's not much there. Once it happens the bourse tends to go nowhere."
Argentina's economy has been slow to reap the expected gains from President Mauricio Macri's reversal of currency controls, relaxation of capital holding requirements and other market deregulation. Inflation has slowed but remains at 24 percent year on year, outstripping a government target of 17 percent.
GDP is expected to grow to 2.8 percent after contracting in 2016, but that is still short of the government's 3.5 percent forecast.
Another risk is that MSCI declines to add Argentina altogether, said Chuck Knudsen, emerging markets equity portfolio specialist at T Rowe Price.
"Then you could see the market selling off," he said. While Knudsen said the probability of Argentina being added to the index was only slightly more than even, other investors and analysts said they viewed the move as a near certainty.
FIS Group's Williams sold out of her positions in Argentina entirely last month.
She has history on her side. Data shows countries upgraded from frontier to emerging markets tend to follow the classic "buy the rumor, sell the fact" pattern. But the "news" seems to come once the markets are incorporated into the index, which tends to happen a year after the announcement.
This pattern was seen most recently when Qatar and the United Arab Emirates were upgraded. From June 2013, when the reclassification was announced, to May 2014, when the UAE's stocks were included in the emerging markets index, Abu Dhabi's benchmark stock exchange rose 38.9 percent. Qatar's general stock index rose 42.8 percent during the equivalent period.
In the year leading up to the announcement of inclusion, Abu Dhabi gained 49.1 percent while Qatar rose 14.9 percent, according to Reuters data.
Both indexes have performed poorly since their stocks were included in the index. Qatari stocks have fallen 28.6 percent since their May 2014 peak and the Abu Dhabi exchange has slumped 14.3 percent over the same period.
Still, some fund managers and analysts say Argentina has a more compelling growth story than previous countries, given its return to international credit markets after a 15-year absence last year following a settlement with holdout creditors and Macri's reforms.
"An upgrade of Argentina to EM status is the result of a much longer-term tailwind created by the increasing openness of their capital markets," said Jay Jacobs, director of research at Global X Funds.
"We believe this openness will stimulate greater foreign investment in much needed areas like infrastructure and create a more competitive business environment, both of which we believe will continue to promote strong growth over the long term." (Reporting by Dion Rabouin; editing by Christian Plumb and David Gregorio)