Argentines Flock to Stocks as Default Propels Best Gains

By Camila Russo

Argentina’s debt crisis is producing the world’s biggest stock gains as investors buy equities as protection from a weaker peso and soaring inflation.
The benchmark Merval index has jumped 85 percent this year in peso terms after stocks soared in August following the country’s second default in 13 years on July 30. While that’s the greatest return among 92 global indexes tracked by Bloomberg, the gain shrinks to 43 percent in dollar terms when using the official exchange rate and just 27 percent at the unofficial rate investors use to skirt currency controls.
The local market is getting a leg up as the peso heads for
its worst year in more than a decade while inflation accelerates to an estimated 38 percent. Stocks (MERVAL) offer protection from the weakening currency and an opportunity for investors to get around government limits on dollar purchases by buying Argentine assets locally and them selling them abroad for dollars, a practice called the blue-chip swap.
“Buying shares means you’re buying real assets -- local companies with earnings that rise in line with inflation,” Christian Reos, the head of research at Buenos Aires brokerage Allaria Ledesma & Cia., said in a telephone interview.
The Merval stock gauge trails only Dubai’s DFM General Index among global indexes tracked by Bloomberg when calculated using dollar returns at the official rate. The Argentine peso has weakened 22 percent this year, the most in the world after the currencies for Ghana and Ukraine.

Blocked Payment

A U.S. judge blocked Argentina’s $539 million interest payment in July after President Cristina Fernandez de Kirchner refused to comply with his orders to pay holders of bonds from the country’s 2001 default in full at the same time. This year’s default has stoked dollar demand as Argentines wager the peso will weaken further as central bank reserves decline. Argentines are also buying stocks as a bet that company valuations will surge if the country settles with its creditors, according to Allaria Ledesma & Cia.
Argentine companies’ share prices are cheaper relative to their earnings than peers. The Merval index of 13 Argentine shares has an average price-to-earnings ratio of 12.1, while Latin America’s biggest indexes, including Brazil’s Ibovespa and Colombia’s Colcap, have ratios that surpass 18.
“Shares have room to more than double in price because they’re so ridiculously cheap now,” Reos said.
All of the index’s shares have climbed this year in peso terms, with power distributor Empresa Distribuidora y Comercializadora Norte SA more than tripling on speculation the government will increase capped electricity rates. Steelmaker Tenaris SA rose the least, with a 47 percent increase.

Tumbling Peso

The peso fell at the fastest pace in seven months in August after the default as exports slowed, reserves fell and demand for dollars increased from Argentines. The Merval jumped 20 percent last month.
Foreigners who want to invest in Argentine stocks with returns in dollars outside of the country can buy American depositary receipts. Investors can move back and forth between peso and dollar securities using the blue-chip swap.
The peso rate implied in that transaction is about 12.8 per dollar, according to a Bloomberg index of eight local shares and ADRs, or 35 percent weaker than the official rate.
Argentina-focused exchange-traded fund Global X MSCI Argentina (ARGT), composed of 28 ADRs, gained 6.5 percent this year, compared with 8.4 percent for the Standard & Poor’s 500 Index.
“Most foreigners invest only in ADRs,” Reos said. “They’ll be more willing to come to the local market as soon as the debt situation gets resolved.”