BLACKROCK LATIN AMERICAN INVESTMENT TRUST PLC

Argentine election: what lies ahead?

The Argentine election has brought a left-leaning government with an ambitious social programme to power at a time when the economy is in a mess. Ed Kuczma, Co-Manager of the BlackRock Latin American Investment Trust, explains why the resulting sell-off may provide opportunities.

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The Argentine election, as expected, brought left-leaning Alberto Fernandez to power, alongside running mate, former Prime Minister Christina Kirchner. This brings an end to the pro-business policies of Mauricio Macri and sees a return to another populist regime. Markets reacted violently on fears that it will plunge the Argentine economy into increasingly desperate economic problems.

On the BlackRock Latin American Investment Trust, we view it slightly differently. While we expected markets to be supportive of Macri’s path to economic normalisation, severe austerity and missteps in managing rising inflation led to a run on the currency in the summer of 2018. This led to an unpopular decision to seek International Monetary Fund (IMF) aid, which combined with renewed concerns over a potential sovereign default led to unravelling confidence in his administration’s tactics.

The economy is still in a tough spot. There is also real uncertainty around Fernandez’s policies. He has Kirchner as his deputy, who has a history of reckless spending. Under Kirchner’s last government vast electricity subsidies contributed to the national debt. She angered markets – and Spanish owners Repsol - with the partial renationalisation of energy group YPF1

Does Fernandez speak his own mind? We don’t know yet. That said, Fernández is a moderate, rather than a firebrand and has said he will respect the IMF loan and play it safe on the Argentine economy. Currency controls are already in place with the aim of stabilising the Argentine peso2

Don’t cry for Argentina just yet

This all looks bad for Argentina. However, the market has sold off aggressively and that is creating opportunity. The Argentinian Merval index slumped from 44,355 to 27,530 on the results of the first round of the Presidential election3. It has recovered somewhat since the start of September, but still reflects broad pessimism on the economic outlook. 

That leaves valuations looking anomalous. Adding up the market cap of every company in the MSCI Argentina still totals less than half of the market cap of the largest Brazilian bank. It seems out of step with one of the largest economies in Latin America. 

The Argentinian stock market is a tiny fraction of the overall Latin American market, at just 1.6% of the MSCI Latin America index4. However, we are overweight, with over 4% of the trust invested there, taking advantage of depressed valuations, that stem from extreme pessimism in the near term.

Argentina in context

There is a question over whether there will be contagion across Latin America. In our view, the problems in Argentina are well-contained. Its recent economic problems have meant that the country has not been significantly integrated into the broader Latin American or global economy. Unlike, say, Europe, where banks across the region were vulnerable to a Greek or Italian default, the biggest risk for the rest of the region from Argentina’s troubles is one of sentiment. 

It is not unrelentingly bad for Argentina: the World Economic Forum points out that Argentina is now enjoying a mutually beneficial relationship with China, who, by 2017, had become the country’s second-largest import partner and third-largest export partner5. This may be a means to help Argentina draw in scientific know-how.

Either way, we think that some of this volatility creates opportunities, as it so often does in the rest of Latin America. It is a small position in the portfolio, but we are overweight the benchmark and comfortable to hold on even during this period of political uncertainty. 

Unless otherwise stated all data is sourced from BlackRock as at October 2019.

Reference to the names of each company mentioned in this communication is merely for explaining the investment strategy and should not be construed as investment advice or investment recommendation of those companies.

1The New York Times, April 2012
2BBC, September 2019
3Bloomberg, November 2019
4MSCI Emerging Markets Latin America Index, October 2019
5World Economic Forum, October 2019

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