Argentinean stocks ETF ARGT broke through multi-year resistance in 2023. It posted a gain of 55% this year, more than doubling the S&P 500’s return.
A lot of that was driven by excitement around populist Javier Milei’s victory in the November presidential election. He’s promised to bring down triple-digit inflation by rolling out painful reforms that include big cuts in government spending. The risk is that it brings a deep recession in the process.
In this Investment Radar piece, we look at whether Argentinean stocks are a good bet, both in the short-and long-term, and whether we should add them to our Asset Ratings.
In the Short-Term, Argentinean Stocks Face Considerable Headwinds
The multi-year cup-and-handle pattern on Argentinean stocks’ ETF ARGT shown in the first chart has a measured target of $94-$95. That’s about 160% upside from today’s levels:
- The pattern took years to develop, so 160% could be a long-term return target for ARGT as the stocks seem well positioned for the future, as we’ll discuss later in the note
- We’re less optimistic in the short-term given the massive 40% rise in ARGT following the November election. Big moves like that have led to exhaustion in momentum historically [1]
- Given the overextension, price looks vulnerable to a short-term flip in sentiment due to worries around the economic hit from the incoming painful reforms
Argentinean stocks could prove good long-term bets if the new government manages to fix its macroeconomic instability at the root, which is excessive government spending:
- The Argentinean government budget has spent most of its existence in deficit [3]
- Argentina has defaulted on its sovereign debt eight times since the mid-1800s
- Lack of fiscal trustworthiness has made global debt markets unwilling to lend to Argentina
- That’s put big pressure on the central bank to print money to maintain government spending
- Money printing has led to high inflation, which weakens the Argentine peso and therefore makes holding Argentinean stocks much less appealing for foreign investors [4]
Annual inflation is running at nearly 200%, eclipsing the inflation rates of other South American economies. High inflation is a nightmare for foreign investors:
- It erodes the real return of assets (i.e., inflation-adjusted)
- It drags the dollar-based returns that U.S. investors earn in Argentina (like those of holding ARGT), as high local inflation erodes the value of the Argentine peso relative to the dollar
Given the significant macroeconomic instability, foreign investors have lost interest in investing in Argentina:
- There’s little foreign direct investment into the country, at around 2% of GDP in 2023. That’s only half of what we see in the rest of Latin America [2]
- Lack of foreign investment means less money to develop some of Argentina’s key energy and mining assets like oil, gas and lithium, as we’ll discuss later
Restoring fiscal credibility would help Argentina bring foreign capital into the country. That’d help fund much-needed energy/mining infrastructure and turn it into an commodities powerhouse.
Considering Argentina’s macro headwinds, you’d think that the stocks would be cheap. But that’s not the case.
Among the biggest companies in the ARGT ETF, most of them are priced at a forward-P/E ratio that’s actually more expensive than similar U.S. businesses.
While Argentinean stocks aren’t trading at dirt-cheap valuations, we think they represent reasonable bets on long-term growth potential as we’ll discuss next.
In the Long-Term, Argentinean Stocks Looks More Constructive
While we’re a cautious on Argentinean stocks in the short-term given how overextended they look, we’re more constructive in the longer-term.
We believe that the new government’s focus on cutting government spending could be a key success factor for Argentina:
- It’ll help restore fiscal credibility, which is at the root of the inflation problem
- Cuts to government spending are easier to implement than raising taxes, but should prove much less damaging to the economy
During the European debt crisis of the early-2010s, for example, the U.K. and Ireland experienced milder and shorter recessions than Italy and Spain because they focused on spending cuts.
Another success factor for Argentina involves their exposure to the commodity cycle:
- Argentina has substantial untapped resources in oil, gas and lithium
- That positions it favorably as a strategic supplier for the clean energy transition, as well as for traditional demand for fossil fuels
- Commodity-related revenue could help turn Argentina’s budget deficits to surpluses, reducing the need for the central bank to print money
Lack of infrastructure investment due to fiscal mismanagement has prevented Argentina from unlocking the full value from this favorable commodity exposure.
We’re optimistic as the authorities look poised to prioritize investment into these assets.
One additional success factor for the Argentinean economy would be the return of massive deposits held abroad:
- Massive macroeconomic instability in Argentina has led to a crisis of confidence in the peso
- Vulnerabilities to peso devaluation have seen Argentineans seek the safety of the dollar
- They’ve moved $250 billion to foreign banks to diversify away from the peso
With the new government poised to restore confidence in coming years, we expect a big portion of those funds to return to Argentina and help boost investment and earnings growth.
Conclusion: Argentinean Stocks = Long-Term Growth at Reasonable Prices
We’re less constructive on ARGT in the short-term given how extended the stocks look. However, we’re a lot more optimistic in the longer-term considering their exposure to the commodity cycle.
While the stocks aren’t trading at ultra-cheap valuations, we believe they’re reasonable enough to represent a good long-term bet on significant growth potential.
The longer-term technicals for Argentinean stocks are looking increasingly constructive:
- The Argentinean stock market/U.S. stock market ratio broke out from long-term downtrend resistance going back to 2008, the end of a multi-year bull market in commodities [5]
- The breakout looks very similar to that seen in 2003 in the early stages of that multi-year commodity bull market
Putting everything together, we’re not adding ARGT to our ratings yet. We’ll be looking make this long-term bet on the commodity cycle once the short-term setup becomes more favorable.
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Footnotes:
[1] We’re using the MSCI Argentina Index to go back further in time (i.e., late-1980s), as the time series for ARGT begins in 2011.
[2] Foreign direct investment captures foreign investors establishing ownership interests in non-domestic entities.
[3] Primary budget deficit excludes interest payments on the debt in computing the budget deficit.
[4] Foreign debt is denominated in U.S. dollars.
[5] Based on MSCI dollar-based indices.