Argentina: Where Risks and Opportunities Abound
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Corporate CEOs, bankers, public functionaries, renowned economists and financial advisors, many of the most influential people in the Argentinean financial markets met to discuss the country´s perspectives for 2013 last Tuesday in a seminar organized by the specialized publication Bank Magazine. One thing is clear: Argentinean stocks are trading at extremely low valuation levels, and many opportunities look tempting.
On the other hand, that's pretty much the only thing there is some consensus about.
It's Politics, Stupid
Just to have an idea about the level of disagreement about the economic future of Argentina, economist Miguel Bein forecasted a GDP growth rate in the area of 5% for next year, while Federico Sturzenegger, CEO of Banco Cuidad, is expecting a contraction of 1%. Different ideological views and political inclinations are responsible for this disagreement, but that doesn't change the fact that Argentinean stocks are facing a lot of uncertainty in the middle term.
The local government has always had an interventionist inclination, but the country still managed to achieve strong economic growth from 2003 to 2011. Depending on where you stand on the political spectrum, you can say that this growth was because of the populist economic policies taken by the government or in spite of them.
Those who prefer free market capitalism have solid reasons to explain economic growth in a context of inadequate policies, mostly on the basis of favorable external conditions and cyclical considerations. Argentina had plenty of room to rebound after the terrible economic crisis of 2002 which made the country's goods and services extremely competitive due to a devalued currency.
Also, steeply rising prices for agro commodities in the last decade have been a big positive for the country and the region as a whole. It's been a golden decade for Latin America in general, and Argentina has benefited enormously from the emergence of Brazil –its main commercial partner – into one of the most successful growth stories in the last years.
We Will Soon Find Out
Things have changed materially over the last year; the Argentinean economy is already in a recession according to official data, while inflation has been accelerating to more than 25% annually. The country has serious infrastructure and energy problems, and the fiscal budget is under severe pressure.
As a response to these challenges, local authorities have decided to increase the leftist tilt of economic policies. The government decided to expropriate the biggest local oil company YPF (NYSE: YPF) from Spanish Repsol. Argentina has now a severe currency control system and interventionism is growing on multiple areas of the economy at the same time.
The Kirchner administration has always been in the middle of Brazil and Venezuela when it comes to economic policies, more leftist than Brazil but not as leftist as Venezuela. But things are changing, Argentina has been moving in the direction of Venezuela lately, not only when it comes to economic policies but also in matters of democratic institutions and relationship with the press.
External conditions will still be quite positive for Argentina as long as grain prices remain high and the Brazilian economy continues recovering in the next year, but the scenario is not as extraordinarily bullish as in the last decade. At the same time, the government has increased its leftist tilt, so we will soon find out if Argentina has been growing due to economic policies or in spite of them and thanks to unusually strong tailwinds.
The Size of the Opportunity
Shares of YPF look really cheap, while they were trading at more than $35 at the beginning of the year; they are selling for less than $11 per share now, this means a P/E ratio below 4. The company has discovered very promising shale gas reservoirs in Vaca Muerta, and is looking for international partners to explore those opportunities.
Local banks are almost ridiculously undervalued: Grupo Financiero Galicia (NASDAQ: GGAL) and Banco Macro (NYSE: BMA) carry P/E ratios of 2.5 and 3 respectively. These banks are financially solid and making big profit margins on their operations. Almost every industry insider in the Bank Magazine seminar agreed on the fact that banks have been very selective in their lending operations over the last years.
Argentina has an undeveloped financial sector in comparison to the size of the country's economy, so local banks are not only cheap; they also have a lot of room to grow if things turn for the better. But the key phrase here is: if things turn for the better.
The Size of the Risks
Many international players have been mentioned as potential partners for YPF when it comes to exploration of new projects, but none of them has committed any money so far. According to several news sources, a memorandum of understanding to develop Vaca Muerta was signed between YPF and Exxonmobil (NYSE: XOM) at the end of March, but there has been no more news on the subject since then.
Owned by the Brazilian government, Petrobras (NYSE: PBR) has also been considered a potential partner for YPF on many occasions, since the Brazilian company already has operations in Argentina and both countries have strong economic and political ties. Unfortunately for YPF investors, no confirmation has come from the Brazilians regarding this possibility either.
Shale gas is a booming industry, and Energy companies are used to investing in countries with high economic and political risk. In spite of that, YPF has not been able to raise any money from international sources since the expropriation. Not surprisingly, expropriations and capital controls are scaring investors away, even the brave oil companies.
And it’s not only a problem related to YPF; interventionist policies are affecting almost every sector of the economy, so investment in fixed assets has been falling notoriously in the last quarters. This has long term implications, as insufficient investment levels can be very damaging to productivity and competitively.
Bottom Line: Not Yet
Many Argentinean stocks could be worth three or four times their current price based on their own corporate fundamentals, but macroeconomic concerns are scaring investors away. Unfortunately, the current administration is responding to economic problems with discretionary and interventionist policies, which are having a pernicious effect on the investment climate and the overall economy. It looks like things could get worse before they get any better for Argentina, so it’s still too soon to hunt for bargains among Argentinean stocks.
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