In the first round of Argentina’s election on October 25, free(ish)-market candidate Mauricio Macri did surprisingly well.
He recorded 34.3% of the vote compared with 36.9% for Daniel Scioli, a leftist supporter of outgoing President Cristina Fernandez.
With other candidates tending to support the opposition, Macri looks well placed to prevail in the runoff on November 22.
But what’s not clear is whether Argentina, after 12 years of rule by Fernandez and her late husband Nestor Kirchner, can be rescued by a Macri government. And whether, for the first time in at least 20 years, Argentina could be a buy for Western investors.
Argentina’s Turbulent History
In 1929, Argentina had one of the world’s wealthiest economies.
However, the 1930s were hard, as world trade collapsed by 65% and protectionism soared, ruining the market for Argentina’s primary goods exports. This led to the legend that capitalism impoverished the people, with the 1930s thereafter being referred to as the “Infamous Decade.”
The early post-war years under nationalist-socialist President Juan Peron were prosperous, as Peron’s government spent the world’s second-largest foreign exchange reserves on social programs and handouts to favored groups.
This cemented Argentine voters’ view that populist economics worked.
The subsequent series of bankruptcies and the country’s gradual decline into poverty were blamed on the feeble coalition governments and inept military regimes that succeeded Peron.
In the 1990s, this seemed to change. A nominally Peronist but actually centrist government under Carlos Menem locked the peso against the dollar, eliminating the country’s chronic inflation.
Menem also privatized the oil and power sectors, as well as the pension system. Unfortunately, that government also ran budget deficits and financed the spending with international borrowing.
Living standards didn’t raise much, as commodity prices remained low through the decade, and at the end of 2001, yet another national bankruptcy occurred. The peso’s value collapsed.
With “capitalism” apparently having ruined the country, the socialist Nestor Kirchner, followed by his wife Cristina Fernandez, took power in 2003.
As the price of Argentine commodities soared, the Kirchners extracted taxes from exporters who had benefited from the peso’s collapse.
Living standards again rose, as they had after 1945. Social programs multiplied, statistics were falsified, Argentina’s creditors were staved off, and various energy assets were re-nationalized. Finally, the pension system was re-nationalized and its assets seized.
The overall result was what Fernandez has called the “Glorious Decade.”
Today, though, the country is finally running out of money. Commodity prices have fallen back, and living standards have again declined. There’s very little appetite among the Argentine people for a return to the free market.
If Macri does win, he’ll be faced with a Senate in which Fernandez’s Peronists have a solid majority and a Congress where they’re only just short, while supporters will number at most a quarter of the Senate and a third of the Congress.
At best, if commodity prices remain low, Macri will bring a repeat of the 1990s, with compromises on policy, a low standard of living, and heavy foreign borrowing.
He does, however, seem likely to solve Argentina’s long-running feud with the Elliott Management-led group of holdout creditors.
An All-Natural Opportunity
For foreign investors, there are nevertheless opportunities.
Indeed, that’s always been the case with Argentina. The natural resources are so great that it’s almost impossible for the big agribusiness companies and energy companies not to make money. For example, there’s a huge shale oil field that’s immensely valuable if oil returns to $100 per barrel.
If Macri holds the government’s demands under control and stabilizes the fiscal position, while allowing the peso to find its natural level, then big businesses both Argentine and foreign will make a great deal of money, even if its people remain poor.
Eventually, popular discontent will bring the Peronists back to power, under some successor to Cristina Fernandez, but that could be a decade away.
And as any good Argentine businessman will tell you, one can make a lot of money in a decade – and store it abroad, where the government can’t get it.
For U.S. investors, Argentina is probably worth an investment, but only a small one.
The best Argentine ETF is the Global X MSCI Argentina ETF (N:ARGT), though you should invest with caution, as it’s only a $12 million fund.
It tracks the MSCI All Argentina 25/50 Index, has an expense ratio of a reasonable 0.75%, and currently trades on 16 times earnings with a 0.5% yield (presumably earnings and dividends would increase rapidly under a new government).
Alternatively, you could invest in a company with major exposure to Argentina’s agribusiness, such as Bunge Limited (N:BG).
Bunge has operated in Argentina since 1884 and is the country’s largest soy exporter – although, given the country’s problems, it’s now well diversified. Bunge is trading at a price-to-earnings (P/E) ratio of 19.5 times and a forward P/E of 10.5 times 2016 earnings. It yields 1.9%.
Bottom line: If you’re looking for international exposure, Argentina holds plenty of promise should Macri win the election.
Good investing,
by Martin Hutchinson