BlackRock: Argentina Stock Market Could Double
The Argentinian stock market could double from today’s levels if Mauricio Macri wins October’s Presidential election in the country, according to BlackRock’s Emily Fletcher.
A victory for Macri seemed unlikely just a few months ago. Having successfully begun implementing a series of economic reforms after being elected in 2015, that template ran into problems in 2018.
A relaxation in inflation targets in December 2017 was followed in April 2018 by significant capital outflows on the back of tighter global monetary conditions and a resurgent US dollar, says Thomas Smith, manager of the Neptune Latin America fund.
This episode forced the country’s Government to tighten both monetary and fiscal policy and reach out to the International Monetary Fund for a $50 billion emergency loan. Continued currency weakness meant that loan had to be re-negotiated just two months after its approval.
In all, the Argentinian peso halved against the US dollar in the space of just six months, inflation shot up to a peak of almost 50% in October and the current account deficit got bigger. Macri’s approval rating waned, declining by 30 percentage points from its November 2017 peak at one point, says Smith.
But things now seem to be looking up for the economy. The peso stabilised through the final four months of 2018 and into 2019 and the stock and bond markets have bounced in the past six weeks.
Elsewhere, policies implemented to contain inflation seem to have worked. Macri’s poll rating is back up to 39%. Now, winning a second term in office doesn’t seem as unlikely. And that could give markets an extra boost over time to keep the current rally going.
Argentina's Stock Market Could Double
“If Macri is re-elected, the market doubles,” says Fletcher, co-manager of BlackRock Frontiers Investment Trust (BRFI).
“We’ve seen a huge multiple contraction and if Argentina could run its current economic programme for another four-year term, it would be on a very different financial footing to where it is now. I think it has the ability to be viable in a way that Argentina has never been before.”
Smith agrees, noting that continuation of policy is needed in Argentina. Fortunately, opposition parties have not yet been able to capitalise on the Government’s weakness and populism has been rejected.
“Following the very negative performance of the equity market in 2018, policy continuity could drive a sharp rerating ahead of the expected economic and earnings recovery in 2020 and beyond,” says Smith.
But Fletcher cautions that there is likely to be some short-term pain along the way. Inflation still remains elevated and the policy implemented to contain it has been to stop printing new money. This will have a contractionary effect, as will its fiscal policy as well as the current account devaluation.
“So, the economy is going to have the mother of all slowdowns,” Fletcher predicts. “But I think that’s what Argentina needs to do in order to re-balance the books.”
Overall, Fletcher likes the economic policies put in place and believes that the currency is now much more attractive today after its substantial decline in 2018. As a result, Argentine debt looks at sustainable levels.
BRFI has 8.2% of its portfolio invested in Argentina, mainly focused on banks. Its largest position is Banco Macro (BMA), which lends to retail customers and small and medium-sized businesses.