Argentina ETFs face the music amid election fallout

Aug 16th, 2019 | By | Category: Equities

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ETFs providing exposure to Argentinian equities have plummeted in value following the surprise results of the country’s presidential primary elections on 11 August 2019.

Argentina ETFs election

Argentina ETFs have lost nearly 25% of their value following the results of the country’s presidential primary elections.

The Global X MSCI Argentina ETF (ARGT US) slumped 24.8% on Monday 12 August 2019.

The fund tracks the MSCI Argentina Index which, with only 8 constituents, covers the large and mid-cap equity segments of Argentina. It comes with an expense ratio of 0.59%.

The iShares MSCI Argentina and Global Exposure ETF (AGT US) posted a near-identical loss of 24.7% over the same period.

This fund tracks the MSCI All Argentina 25/50 Index, providing broader coverage of the Argentinian equity universe by including overseas-listed firms, such as those listed in New York, that are headquartered in Argentina or carry out the majority of their operations in Argentina. Its expense ratio is also 0.59%.

Argentina’s currency, the peso, already known for its volatility, also lost a quarter of its value relative to the US dollar.

Electoral upset

Going into the primaries, political analysts expected incumbent President Mauricio Macri to post a clear lead; however, leftist politician Alberto Fernandez, whose running mate is controversial former president Cristina Kirchner, pulled off a surprise win. Fernandez’s victory was decisive, securing 48% of the vote compared to 32% for Macri with a high election turnout of 75%.

Sean Newman, a Senior Strategist at Invesco, explains why the markets reacted so badly to the results: “In Argentina, the candidacy of Kirchner is perceived as a return of populism — often referred to as ‘Kichnerism/Peronism’. This brand of populism (which was also touted by Kirchner’s husband, former president Nestor Kirchner) is faulted with creating much of the economic disarray inherited by Macri when he took office.”

Newman continues, “In 2001, Nestor Kirchner took over the presidency amid a similar economic shock. He restructured the country’s external hard currency debt, raising concerns that the ticket of Fernandez and Cristina Kirchner might take the same tack.”

The election result raises questions as to whether Argentina will adhere to the current programme established with the International Monetary Fund (IMF) – a relationship that is considered vital to the country being able to service its debt – if Fernandez/Kirchner takes office.

While Fernandez pledged policy continuity during his election campaign, global credit rating agencies could not be reassured. Fitch promptly downgraded Argentina from a ‘B’ to a ‘CCC’ rating, while Standard & Poor’s lowered the country from a ‘B’ to a ‘B-‘, while also slapping it with a negative outlook.

While both ETFs have stabilized in the days since the election result, the outlook for the following months looks uncertain. The first round of the presidential election is only scheduled for 27 October, with the second round, if required, on 24 November.

The question on investors minds is whether this will be enough time for Macri to make a comeback. The markets would likely appreciate such an occurrence. After all, the Global X MSCI Argentina ETF gained 89.2% between 22 November 2015 (when Macri won the General Election) and the end of 2017, compared to a rise of 43.2% for the iShares Core MSCI Emerging Markets ETF (IEMG US) over the same period.

The chances of a Macri victory look slim, however. Due to the resounding support of Fernandez/Kirchner in the primaries, Invesco has assigned just a 10% probability to a Macri victory in the October election.

For the time being, Argentina ETFs may only find appeal with the bravest of contrarian investors willing to stomach considerable levels of risk.

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