August 20, 2019

The Federal Reserve has now largely stopped its monetary tightening, yet the most vulnerable emerging market currencies are still falling like flies. The worst performer is the Argentine peso, which traded as low as 62 to the dollar on the nation’s surprising election results last week. For all intents and purposes, the peso lost about half its value in 2018, catalyzed by the Fed’s monetary tightening, and it halved again in 2019, with the political landscape shifting against Argentina’s present President, Mauricio Macri.

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

The populist opposition candidate – Alberto Fernandez, with former center-left ex-president Cristina Fernandez de Kirchner as his running mate – was 15 points ahead of Macri in the primaries. This leaves the Fernandez/de Kirchner ticket as the favorite to win the October election without a second round.

It is entirely another matter that Ms. de Kirchner’s policies put Argentina in this terrible economic state of affairs, which Macri was trying to clean up. As is often the case, trying to make painful reforms necessary to fix the country can get you thrown out of office, which is what appears to be happening with Macri.

The Argentine peso went down on the news of the election result and so did Argentina’s stock market. When compounding the move in the stock market by the depreciation rate of the Argentine peso, the stock market ended up losing 48% in a single day last week. This is like having two back-to-back 1987 “Black Mondays” on Wall Street compressed into a single day.

With the trade friction between the U.S. and China dominating the front-page news here, who’s going to worry about Argentina, right? This is why so little has been reported about this lower hemisphere event.

The reason for the local panic is that the opposition presidential candidate has been known to not favor the $57 billion IMF bailout that Macri secured last year. He went on record last week stating that the country would struggle under present conditions to repay the IMF loan, so he would seek to renegotiate repayment terms. Fernandez described the IMF loan as “harmful,” even though he admitted that without the IMF deal the country would have defaulted on its repayments, adding that the relationship with the IMF had to be one of “respect” not “submission.” This sure sounds like he is trying to have his cake and eat it too, which is often the case in politics when candidates would say almost anything to get into office.

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

This is a dangerous situation for long-term investors in Argentinian stocks, as the October election is some time away, yet the Argentine country ETF got so bombed out that there may be a trade for short-term speculators. There may be a rebound in the AGT ADR “to close the gap” in the country’s iShares and in more than half a dozen Argentine ADRs that are listed on NYSE or Nasdaq. One of the more liquid ADRs is Telecom Argentina (TEO), which looks similarly bombed out to the country’s iShares.

(Navellier & Associates does not own a position in Telecom Argentina (TEO), Ivan Martchev does not own Telecom Argentina (TEO), in personal accounts.)

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

This is a dangerous situation for long-term investors in Argentinian stocks, as the October election is some time away, yet the Argentine country ETF got so bombed out that there may be a trade for short-term speculators. There may be a rebound in the AGT ADR “to close the gap” in the country’s iShares and in more than half a dozen Argentine ADRs that are listed on NYSE or Nasdaq. One of the more liquid ADRs is Telecom Argentina (TEO), which looks similarly bombed out to the country’s iShares.

(Navellier & Associates does not own a position in Telecom Argentina (TEO), Ivan Martchev does not own Telecom Argentina (TEO), in personal accounts.)

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

While over the long term the Argentine stock market and the peso are positively correlated, it is significantly more dramatic if one looks at the long-term chart of Telecom Argentina (TEO), priced in U.S. dollars – the point being that the present situation is not a buy-and-hold opportunity until the new Argentine administration is in and has managed to roll out its new peso bastardization plan.

It is a big stretch to call the component of the Merval Index “blue chips,” but the point remains that stocks in general are a hedge against inflation as their revenues and earnings are adjusted for the higher inflation rate. It looks like we are ready to make yet another of those adjustments in Argentina.

About The Author

Ivan Martchev
INVESTMENT STRATEGIST

Ivan Martchev is an investment strategist with Navellier.  Previously, Ivan served as editorial director at InvestorPlace Media. Ivan was editor of Louis Rukeyser’s Mutual Funds and associate editor of Personal Finance. Ivan is also co-author of The Silk Road to Riches (Financial Times Press). The book provided analysis of geopolitical issues and investment strategy in natural resources and emerging markets with an emphasis on Asia. The book also correctly predicted the collapse in the U.S. real estate market, the rise of precious metals, and the resulting increased investor interest in emerging markets. Ivan’s commentaries have been published by MSNBC, The Motley Fool, MarketWatch, and others. All content of “Global Mail” represents the opinion of Ivan Martchev

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