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.

Capital at risk. The value of investments and the income from them can fall as well as rise and are not guaranteed. You may not get back the amount originally invested. 

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

Risk Warnings

Past performance is not a reliable indicator of current or future results and should not be the sole factor of consideration when selecting a product or strategy. 

Trust Specific Risks 

Exchange rate risk: The return of your investment may increase or decrease as a result of currency fluctuations. 

Emerging markets: Emerging market investments are usually associated with higher investment risk than developed market investments. Therefore, the value of these investments may be unpredictable and subject to greater variation. 

Gearing risk: Investment strategies, such as borrowing, used by the Trust can result in even larger losses suffered when the value of the underlying investments fall. 

Important Information 

Issued by BlackRock Investment Management (UK) Limited, authorised and regulated by the Financial Conduct Authority. Registered office: 12 Throgmorton Avenue, London, EC2N 2DL. Tel: + 44 (0)20 7743 3000. Registered in England and Wales No. 2020394. For your protection telephone calls are usually recorded. BlackRock is a trading name of BlackRock Investment Management (UK) Limited. Please refer to the Financial Conduct Authority website for a list of authorised activities conducted by BlackRock. 

The Company is managed by BlackRock Fund Managers Limited (BFM) as the AIFM. BFM has delegated certain investment management and other ancillary services to BlackRock Investment Management (UK) Limited. The Company’s shares are traded on the London Stock Exchange and dealing may only be through a member of the Exchange. The Company will not invest more than 15% of its gross assets in other listed investment trusts. SEDOL™ is a trademark of the London Stock Exchange plc and is used under licence. 

Net Asset Value (NAV) performance is not the same as share price performance, and shareholders may realise returns that are lower or higher than NAV performance. 

The BlackRock Latin American Investment Trust currently conducts its affairs so that its securities can be recommended by IFAs to ordinary retail investors in accordance with the Financial Conduct Authority’s rules in relation to non-mainstream investment products and intends to continue to do so for the foreseeable future. The securities are excluded from the Financial Conduct Authority’s restrictions which apply to non-mainstream investment products because they are shares in an investment trust. 

Any research in this document has been procured and may have been acted on by BlackRock for its own purpose. The results of such research are being made available only incidentally. The views expressed do not constitute investment or any other advice and are subject to change. They do not necessarily reflect the views of any company in the BlackRock Group or any part thereof and no assurances are made as to their accuracy. 

This document is for information purposes only and does not constitute an offer or invitation to anyone to invest in any BlackRock funds and has not been prepared in connection with any such offer. 

© 2019 BlackRock, Inc. All Rights reserved. BLACKROCK, BLACKROCK SOLUTIONS, iSHARES, BUILD ON BLACKROCK and SO WHAT DO I DO WITH MY MONEY are registered and unregistered trademarks of BlackRock, Inc. or its subsidiaries in the United States and elsewhere. All other trademarks are those of their respective owners.