Losers from Argentina rout are not giving up
Fund managers recently burned by Argentina are doubling down on the country’s bonds, saying that prices have dropped to levels that should offer solid returns.
Many investors endured big marked-to-market losses in the wake of August’s primary election, which paved the way for a return of a Peronist government. Stocks and bonds plunged, while the peso dropped lost more than one-fifth of its value against the US dollar.
But some say the market overreacted, arguing that Argentina is better positioned to avoid a repeat of its chaotic default on $100bn of debts almost two decades ago. Prices of the country’s sovereign bonds are now below levels some investors believe are in line with potential recovery values, once the debts have been restructured.
“If you look at where pricing is for sovereign bonds, about 40 cents on the dollar, there is some asymmetry here,” said one emerging markets investor who lost money in the rout. “Think about the restructuring for the 2001 default where you had recoveries in the low 30s, Argentina has different circumstances now. They still have a lot of debt but less than you had back then.”
Robert Gibbins, the chief investment officer of hedge fund Autonomy Capital, agreed that the election fallout presented an opportunity to take positions in Argentina’s $50bn of longer term debt, the majority of which is held by foreign investors. “The starting position here is just very different than where everyone remembers from 2001,” he said. His $6bn fund, an emerging-market specialist, fell 16.3 per cent in the first two weeks of August, more than wiping out its gains from earlier in the year.
John Morton, a portfolio manager at New Jersey-based fund Lord Abbett, highlighted Buenos Aires’ progress in eliminating its budget and current account deficits. “It came at a great expense . . . but I think [Peronist candidate Alberto Fernández] is inheriting a situation probably as good as it’s been in probably eight years.”
Mr Morton said there had been “two narratives” in the market. “One was everything was going to be great, which wasn’t correct. And now the new narrative, which is 30 cents on the dollar, is also not correct.”
Argentine assets have faced one drubbing after another since the election result. The dollar-denominated century bond, which was issued to much fanfare in 2017, was trading at roughly 45 cents on the dollar on Friday, while the country’s bonds maturing in 2028 have also sunk to similar levels.
The government has adopted emergency measures to stem the financial panic and shore up the peso. On September 1, President Mauricio Macri announced currency controls to safeguard the country’s foreign reserves.
The announcement followed the government’s decision to delay payment on $101bn of debt — a move classified as a technical default by rating agencies Standard & Poor’s and Fitch Ratings.
Analysts at Capital Economics drew parallels to 2001, stating Argentina’s experience back then set “a poor precedent”. They said: “The ‘megaswap’ restructuring in the middle of that year failed to make the public finances sustainable, and was followed by big further losses for bondholders and a full default six months later.”
Again, much hinges on the IMF, which is scheduled to disburse another $5.4bn this month from its record $56bn bailout programme. While the organisation recently reiterated it would “continue to stand with Argentina during these challenging times,” many investors question how full-throated its support of Mr Fernández will be.
Investors are girding themselves for the likelihood that the fund pauses its September payout. “It’s very unlikely that we’ve seen the end of the volatility,” warned Alejo Czerwonko at UBS Global Wealth Management.
Colby Smith and Ortenca Aliaj