by Dan Burrows | December 21, 2012 11:26 am
If you’re looking for stocks staging a huge year-end rally, look no father than Argentina.
But only look — don’t touch.
Yes, Argentina’s equity market benchmark Merval index is up a staggering 28% since late November, or ever since a U.S. appeals court stopped the countdown to a possible default on the country’s debt.
Too bad the proximate cause of the jump — a relief rally — and the country’s extreme economic problems and political uncertainty make the gains look unsustainable.
Unlike other sovereign debt crises, the fear with Argentina isn’t so much that a default would shut it out of the global debt markets. After all, the country hasn’t tapped external credit for more than a decade, or ever since it defaulted on $95 billion back in 2001.
However, another default would likely make it harder and more expensive for import/export companies to get critical credit in any currency — exacerbating already trying economic and corporate conditions.
A default would also be yet another black mark for a government that seems to go out of its way to scare off capital. The Argentine government’s renationalization of oil company YPF (NYSE:YPF) in early 2012 sure didn’t do itself any favors in reassuring already skittish foreign investors.
Indeed, global investors have been pulling up stakes and fleeing in droves. The flight of foreign capital accelerated to a three-year high of nearly $22 billion last year — and was stanched only when the government cracked down with strict foreign exchange controls. Had it not acted, the central bank was at risk of running out of dollars (which it needs to pay the foreign creditors it deems worthy of repayment).
Meanwhile, sluggish growth in Brazil, by far its largest trading partner, has Argentina’s economy coming in for a hard landing. After expanding at a torrid 9.2% rate in 2010 and 8.9% last year, GDP flatlined in the second quarter and will be lucky to hit 2% for all of 2012.
And then there’s inflation, which has been averaging 20% a year for years, even if the government won’t admit it. Heck, the official stats on this count are so dodgy that The Economist stopped printing them earlier this year.
Most important: Even if you wanted to plunge into Argentine stocks — that is, after missing the nearly 30% rally — it’s not all that easy.
You’re sure not going to invest directly — using dollars to buy pesos to buy stocks on the Merval — because capital controls would make that a roach motel: Your dollars will go into Argentina, but they won’t come out.
Furthermore, the only country-specific exchange-traded fund, the Global X FTSE Argentina 20 ETF (NYSE:ARGT), is rather illiquid and tiny, with an average daily volume of just 4,000 shares and net assets of about $3 million.
It also doesn’t help that because the ETF tracks only a small subset of the Argentine stock market, it has missed most of the upside. The Merval may be up 28% since Nov. 22, but the FTSE Argentina 20 Index, as tracked by ARGT, gained just 11%.
Even worse: For the year-to-date, the Merval is up about 15%, while ARGT is down about 15%. The FTSE Argentina index just isn’t a good proxy for the broader market in that country.
Sure, you could put together a basket of Argentina ADRs on your own, but why would you? Only 16 Argentine companies are listed on a major U.S. exchange. You get 25% more diversification just by buying the ETF, which captures those ADRs anyway.
There’s simply no good reason — or good way — to dive into Argentina at this point. The easy money has been made. And it could all come crashing down when Argentina and its bondholders go back to court in a couple months.
As of this writing, Dan Burrows did not hold positions in any of the aforementioned securities.
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