Argentina ascends: Hasenstab, Mobius & more on the new EM

Macri momentum

Market commentators have predicted the ascent of Saudi Arabia to emerging market status for many months, but the MSCI surprised some in its mid-year review by also promoting Argentina – which accounted for 19.1% of the MSCI Frontier Market Equities index – to the tier above.

While headlines have focused on the country’s recent aid package from the IMF and its legacy of currency devaluations and snap crashes, leading fund managers have been quick to champion the improvements made under President Mauricio Macri.

Here three leading fund managers reveal why Argentina is showing strength and could provide long-term gains following its new EM status, as well as drawbacks that need addressing.

True turnaround story

Michael Hasenstab, CIO of Templeton Global Macro Group, highlighted Argentina as a prime example of a country that has improved its governance and, therefore, improved market efficiency.

In an excerpt from an exclusive interview with Citywire Selector, the bond giant reveals why it can only further improve from here and why he recently bought a large tranche of the country's debt.

‘In some ways actually the IMF came to Argentina to show support as it is a non-conditional programme and Argentina is doing everything that an IMF programme would have asked of them without having asked. It is really sign of support. Argentina is a low level according to our proprietary model of how rank countries but our own team also does a projection of where they think this country is going to go in three years’ time.

‘So improving the effectiveness of government, tackling corruption, improving institutions, infrastructure spending and social cohesion, we expect Argentina out of all the countries we evaluate to have the highest projected change, not the highest level because they have a long way to go but that delta will do a lot to improve the welfare of Argentinians and financial returns.

Eyeing opportunities

The country still has challenges, says EM veteran Mark Mobius, but the upturn under Macri cannot be ignored and the longer-term returns look healthier than perhaps some of the wider market are giving it credit for.

'I think in the case of Argentina we have been through this before, you get a Peronist government which wants to spend, spend, spend and they overdo it and you have a big devaluation and inflation and another government comes in. That is where we are now.

'Macri is trying to pick up the pieces left by Cristina, she was spending like crazy and with all these electric power subsidies and all the rest of it. I think now is a good time to be looking at Argentina, the market has come down, the currency is weak and I think there is some value in that market. Is it a potential entry point? Yes, I think it is time to look at it again.'

Cutting back

Citywire A-rated Andrew Brudenell has reduced exposure to Argentina but remains largely positive on the strides made by Macri. With the new administration having achieved some immediate success, the Ashmore manager says Macri now faces a real test of making meaningful change.

'We have reduced exposure to Argentina recently but there has been a real willingness to change and that is exactly what we look for. This means we did have Argentina at 22% of the portfolio at one point, albeit we sold this down due to some profit-taking and opportunities elsewhere.

'We can see that they have done work but a large amount of what the Macri administration did was to address the low-hanging fruit when it came to reforms and institutional challenges. We took money off the table because those opportunities had gone at a lower level but that doesn’t mean, without continued reform, there aren’t still opportunities. In fact, we still have Argentina as our top exposure, for now, at 14.8%.'