by Carl Delfeld, Global Markets Strategists, The Oxford Club
Wednesday, April 17, 2013: Issue #2014
It came up while grilling steaks and enjoying a gin and tonic after watching the riveting finish to the Masters golf tournament. Australia’s Adam Scott outplayed Angel Cabrera of Argentina in pouring rain to capture the coveted green jacket.
Taking this international competition to a different arena, an interesting question was raised. Where would you rather invest right now, Australia or Argentina?
On the face of it, it seems like a silly question.
After all, Australia has had 16 years of continuous growth, is at the sweet spot of Asian trade and boasts a financially strong free-market economy. Argentina is, well, another kettle of fish with high inflation, import and capital restrictions, and high levels of government interference in the economy.
But let’s ask the question a different way. Which country offers investors lower downside risk and higher upside potential?
In the case of Australia, expectations to continue the economic run are high. But a lot could happen to derail those high hopes.
My first thought is Australia’s dependency on China’s capital and its import demand will boomerang. A third of Australian exports go to China and 96% of China’s investment in Australia is in commodities, which, as we saw on Monday, could go south at any time.
Australia’s high real estate prices could also pop – leading to financial turbulence.
Finally, complacency is an issue. Whenever we have long-term success like we’ve seen in Australia, investors tend to lose their focus. They miss the changes in the market. They ignore the warnings signs of trouble ahead… and they get punished for it.
Can’t Get Worse
In contrast, to put it politely, expectations for Argentina are low. They can’t get worse. This is why its market trades at valuations about half that of Australia’s.
In other words, we seem to be at what John Templeton famously called the “point of maximum pessimism.” Templeton made a lot of money jumping into the markets while most investors headed for the hills.
This is important.
Templeton’s record shows things do not have to be great for markets to make a major move. Like I said last week, they just have to get better. Oftentimes, the mere chance of political change and market reforms can lead a bull market.
The Argentine citizenry cries out for economic freedom. And while President Christina Kirchner’s administration is unlikely to provide it, she won’t be in power forever. Jockeying for the top job is already underway.
But remember that while buying low is important, finding bargains among quality companies will always give you the best chance of success.
This is why I selected farming giant Cresud (Nasdaq: CRESY) as my Argentine pick last year.
Cresud is one of the largest farming companies in Latin America. It produces typical farm products like corn, wheat, soybeans, sunflower, sorghum, milk and beef cattle on about half a million hectares of land.
In addition to Argentina, Cresud owns significant farmland in Brazil as well as in other South American countries.
Cresud also has a great balance sheet. In fact, investing in the stock is largely a play on the company’s assets, as quality farmland is becoming more and more difficult to find in the world.
The stock is trading at about 15% below the company’s book value. But because land bought many years ago by the company is carried on the balance sheet at cost rather than at current market prices, the stock represents an even bigger value.
As a bonus, Cresud offers a 5.2% dividend yield and owns 55% of Argentinean real estate developer IRSA. A real estate play like Cresud is a great way to play a turnaround because the sector is usually the first to sharply recover.
Follow the Leaders
There are sophisticated investors out there thinking and acting along these lines… and they’re investing in Argentina.
DPEC Partners, a New York-based private equity firm, has invested in a sizable vineyard and real estate development in Mendoza, Argentina, called Algodon Wine Estates. It also purchased and restored a historic mansion, transforming it into a luxury boutique hotel in Buenos Aires’ most elegant neighborhood.
Sounds like a winning strategy to me.
And despite their different economic circumstances right now, Argentina and Australia have more in common than you might think. The list includes ample natural resources, vibrant cultures, openness to immigrants and warm hospitality, not to mention great golf courses… and some of the best wines in the world.
The lesson here is to be open-minded and willing to go against the crowd.
Zig when others zag.