Investing in Argentina: Why You Should Look for “Trouble” If You Want Bigger Returns
by Carl Delfeld, Contributing Editor
Thursday, September 2, 2010: Issue #1337
It happens every time…
I’d just finished a review of the global markets at an investment pow-wow and was headed out the door when a dapper gentleman approached me.
Almost whispering, he asked, “Carl, what country looks good right now?”
Without fail, I always handle this question as legendary global investor Sir John Templeton did at a conference I attended decades ago: “Sir, I beg your pardon but that is the wrong question… (long pause)… you should be asking me what country looks absolutely miserable.”
If you’re perplexed by this rationale, you’re probably not alone. After all, human nature sends us galloping after the hot, headline-grabbing markets, while shunning the value that lies under the surface of bad news bear markets.
I urge you to fight this destructive emotion and – as difficult as it may be – ignore the crowd.
Instead, sit down and think about what markets the pundits aren’t talking about? So where do you start?
Land of the Rising Sun… And Sinking Sentiment
Let’s hit Japan first – and the country’s sour-tasting brew: Its exporters are choking on the yen’s 15-year high. There’s no economic growth. Deflation persists. The national debt is sky-high. Interest rates are almost zero. In addition, Chinese mania is grabbing the headlines. Japanese policy makers are befuddled and investors are rattled.
But my colleagues Alexander Green and Louis Basenese have written extensively about why, despite all this negativity, Japan represents a very good investment opportunity.
Check out Alex’s column on how to play Japan’s stock market revival, plus Lou’s columns on why Japanese small cap stocks will drive the country forward and why you should invest in them.
From Japan to Latin America – and a superb contrarian play…
From the Top Dogs to the Alley Cat
It’s no surprise to see Brazil receiving most of the economic pundits’ accolades these days. Chile isn’t far behind either.
While they’re Latin America’s stars, though, Argentina seems to have been relegated to the gutter. That’s a far cry from a century ago when Argentina was one of the world’s wealthiest countries.
And even after its “Greek moment” – a devastating 2001-2002 collapse that brought a debt default – its economy is still twice as big as Chile’s, rich in natural resources and offers investors considerable upside potential.
Let’s dig deeper…
Food Fires Up Argentinean Growth Rate
More than most emerging market countries, Argentina is akin to a rollercoaster, throwing investors from growth and optimism to recession and despair.
And right now, the ‘coaster is swinging to the positive side. The country’s upswing is accelerating, thanks in part to rapid increases in agricultural commodities prices. And with the higher income from exports, the food boom has led to higher consumer and business spending.
The Economist notes that Asia’s rising demand for food has pushed up the price of exports of soya beans and other products from the fertile pampas. That’s boosted tax revenues and reserves, which have climbed to $50 billion, thanks to a healthy trade surplus.
End result: Independent Argentinean GDP estimates for 2010 have risen from 3% at the beginning of the year to just under 9% today.
There is a primary concern, however…
Investing in Argentina Does Have Downside… But the Upside is Better
What would some countries give for a bit of inflation? (Stand up Japan!)
Argentina has some to spare. The country’s official consumer price index rose by 11% over the past year, yet the government granted wage increases of around 25% to workers and recently raised tax brackets by 20%. This is probably a policy move with next year’s presidential election in mind. In addition, Argentina has attracted barely half as much foreign investment as Chile since 2007.
On balance, though, Argentina is moving in the right direction…
- Fitch Ratings recently upgraded Argentina’s long-term foreign currency debt.
- The country has successfully managed to swap much of the debt still in default – something that has given the government a new lease of life.
- China recently signed a deal to pump nearly $10 billion into Argentina’s creaking rail network and build a subway in the second city of Córdoba.
- Argentina is one of a few countries whose stocks are trading at a price-to-earnings ratio of just nine times.
So how do you make money from the situation?
Argentina: Great Wine… Skillful Soccer Players… Stellar Stocks
Smelling profits in Argentina, I put together a basket of seven equally weighted Argentinean companies, which trade on the U.S. markets. It was essentially like creating my own ETF.
That was on May 28 – and so far, six of the seven are up nicely and the basket is up 16.8%, compared with 0.7% for the MSCI World Index.
Three of the seven stocks are Banco Macro (NYSE: BMA), Telcom Argentina (NYSE: TEO) and YPF Sociedad Anonima (NYSE: YPF).
One other company I’m thinking of adding to the basket is MercadoLibre (Nasdaq: MELI). It’s the eBay of Argentina (in fact, eBay has an 18% stake). While it’s based in Buenos Aires, it has operations throughout Los Angeles and company insiders own a hefty 35% of the shares.
Let me leave you with this question: Do you think it’s true that in order to scoop big profits from international investing, you need to avoid the herd by looking for distressed nations?
Your answer should be a resounding “yes.”
Not just any struggling nations, of course. But as a rule of thumb, take profits when values and expectations are high and keep an eye out for trouble.
Good investing,
Carl Delfeld
Any investment contains risk. Please see our disclaimer.
9 Responses to “Investing in Argentina: Why You Should Look for “Trouble” If You Want Bigger Returns”
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Ridicolous piece.
Inflation is 25%, the gangsters in argentina are frauding billions in interests to CER linked bondholders.
The country is still in default on 12 Billions $.
This puppet country refuse IMF revision and mantains 7 Billions $ due to Club de Paris in default … to add to the other 12.
Foreign investements disappeared so far because off more than 30 legal causes before ICSID.
China investement is a simple propaganda joke .. a dare you to show where the China’s money went.
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Yes, Argentina has tremendous potential provided the politicians get their priorities sorted out
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Becreful with Argentina!! THis country is a mess. Polititian are more currupt than Mexico. And people dont like foreign investments.
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Dear Sir:
My name is Sonia and I am a business woman. Have you ever been to Argentina? This is a beautiful country but the main problem here are the leaders. It is true that the politician are corrupt but it is not true that this country is a mess. That is just a general statement, I own three stores that belong to a well known brand here and my incomes and savings have been increasing during the last ten years. This is just an example, but through hard work you can have good profits.
It is wrong to think that people don’t like foreign investments, we do need them because the people who have money here, don’t invest it, just keep it in banks.
In my personal opinion there is a lack of imagination, people don’t know how to create new opportunities for business and we are looking at you as models to follow.
Sonia
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No one else is talking about Argentina. Very illuminating. Want more info.
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argentina stock market moves 7 million dollar per dsy, a joke.the inflation is 3% not 11% as the of
ficials numbers say that are also a joke. the chances of devaluation of the peso is high. only venezuelan president chavez lends money to argentina at 12% annual interest.Argentina is borrowing this money because they will not pay back.85% of argentina exports are agriculture products, meat no more for export,but agrobussines is only 11% of the gross national product. the rest mainly services and a industrie that do export.when the goverment cannot met his international payments obligation and imports, they devalue.same story for many years with any different goverment. is the economy s….sorry
carlosalbertocarpena@gmail.com
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This is also fine for those with large amounts of capital to risk. The ordinary Argentine has to put up with inflation which is not as subdued as the article would suggest.
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It’s been 11 months since i put money in the country, (7 companies) I’ve almost doubled the money!
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Dear Sir
Thank you for speaking right things about this country. I am a business woman and I think it is unfair to say negatives aspects without knowing the reality. I have been growing through the last ten years!
Sonia
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