Argentina & Greece: Time to Put Your Eggs in Two Basket Cases?

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Their politics may be screwed up, but their companies may not be.  Bruno del Ama, CEO of Global X Funds, discusses his firm’s controversial decision to launch ETFs for investors interested in accessing two of the globe’s most maligned markets.  The mismatch between perception and reality may prove promising for risk-lovers.

Nick Slepko:  Global X appears to have a soft spot for economic basket cases.  In March 2011, you listed the Global X FTSE Argentina 20 ETF (NYSEMKT: ARGT) and about a year ago kicked off the Global X FTSE Greece 20 ETF (NYSEMKT: GREK).  What was your reasoning, and how has the experience been?  Will you be adding Venezuela to your roster of financial luminaries any time soon? 

Bruno del Ama:  We will not be adding Venezuela. [laughs]  But you are pointing out something important.  The market sometimes has difficulty understanding what Global X is trying to achieve.  When you mention Colombia and MLPs [US real estate and resource securities with special tax advantages] in the same sentence, it can confuse people.  The common element and common theme to Global X’s funds is that we provide access to parts of the capital markets that we believe will outperform over the next decade.

Argentina and Greece are the two exceptions to this.  The second way that Global X adds value for investors is by providing access to hard to reach parts of the global capital markets.  Both countries are very different however.  In the case of Argentina, it’s predominately an access story.  It is a difficult market to access because of its currency controls, especially when trying to bring money out of Argentina.  Our ETF makes it more cost-effective to access the market. Due to the ongoing issues in Argentina, the Argentinean market is trading at about seven times earnings.  However, the country does have economic potential in the form of natural resources (such as agricultural products like soybeans and energy resources like natural gas), but unfortunately government policies have inhibited the development of these resources.  Pro-market reforms could help expand the middle class and develop these resources, which could make current valuations compelling for the longer term investor.

Slepko:  Why are six non-Argentine mining companies (~25% of the ETF assets) included in the Argentina ETF? 

del Ama:   The Argentina ETF is fully comprised of securities that directly participate in the Argentine economy and can be accessed by foreign investors without restrictions.  This includes Argentinean ADRs such as Tenaris (NYSE: TS) and Mercadolibre (NASDAQ: MELI), as well as a few mining companies that derive a material percentage of their revenues from Argentina, such as [Canada’s] McEwen Mining (NYSE: MUX), which operates the San Jose and Los Azules mines in Argentina.  The methodology developed by the index provider, FTSE, also limits the size of these companies in the index.

Slepko:  The Motley Fool CAPS community is in almost total agreement with you in expecting Tenaris (96.1%), Mercadolibre (95.2%), and McEwen (87.1%) to outperform the market – in fact a weighted average of all CAPS players (93.5%) and all-star CAPS players (92.5%) appear bullish on your Argentina ETF holdings.

<img src="/media/images/user_115/caps-on-argt-flagy-v2_large.jpg" />

Unfortunately, only four of the Greece ETF holdings (accounting for ~46% of the fund’s net assets) are eligible to be ranked by the CAPS community (which is essentially limited to tickers traded in the US).  So, while they are evenly split on the future prospects of the ETF itself, the CAPS community (be they all or all-star) is also positive about your top four Greek picks – all four of which receive a 90% or higher outperform consensus.

del Ama:  Greece is not a “ten-year-cycle” type of investment, but it is also not a purely “provide-access” type of investment.  The issues in Greece are pretty well-understood, and the Greek economy will be suffering for the next decade.  Having said that, Greece’s equity market is down more than 90% since the end of 2007 and is the only place in the world where you can buy many companies for less than cash.  In other words, you could theoretically buy a fully operating, profitable company and take whatever money they have on their balance sheet, pay down their debts, and then write a check to yourself with whatever cash that’s remaining. Hellenic Exchanges Group (ASE:EXAE), the parent company of the Athens Exchange, is an example of a company that trades for less than net cash.   

[continued in part 2]




Nick Slepko (hukgon) has no position in any company mentioned here at the time of publication.  The Motley Fool owns shares of MercadoLibre. Motley Fool newsletter services recommend MercadoLibre. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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