On December 10th Argentina will have a new president. We do not know yet with certainty who will be sitting on the “sillón de Rivadavia", but we do know it will be someone new. A lot of investors have been betting on the new policies that will come along with this change, rallying with the increasing prospects of politic and economic reform: Massa running for parliament in 2013, Macri coming close second in the first round or Scioli showing his willingness to negotiate with holdouts.
So, if one believes that Argentina will effectively undergo reforms that will make its economic regime converge to that of its neighbors, where should then investors focus their capital?
So, if one believes that Argentina will effectively undergo reforms that will make its economic regime converge to that of its neighbors, where should then investors focus their capital?
The bullish view for Argentine assets is based on the fact that a new more market-friendly government would take the steps that would lower the country´s sovereign risk spreads and eliminate current capital controls; both things would have an immediate impact by reducing discount rates that would boost multiples and valuations. However, capital controls have come coupled with an array of local sector measures and realities that have not only diminished the value of asset values, but also generated severe price dislocations that make some assets more attractive than others under the light of foreseeable reform.
Since there are very few publicly traded assets and recent relevant transactions, the search for value needs to be pursued based on the general conditions that generate attractive investment opportunities in a sector, rather than a standard valuation approach..Through a series of 3 articles I will analyse the big forces in play for the Argentine valuations' recovery story and the best strategy to invest in it:
i)Sovereign Risk
ii) Capital Controls
iii) Sector Policy
Since there are very few publicly traded assets and recent relevant transactions, the search for value needs to be pursued based on the general conditions that generate attractive investment opportunities in a sector, rather than a standard valuation approach..Through a series of 3 articles I will analyse the big forces in play for the Argentine valuations' recovery story and the best strategy to invest in it:
i)Sovereign Risk
ii) Capital Controls
iii) Sector Policy
Sovereign risk has been high due to successive hostile measures towards investors: default, cheating on inflation-linked bonds, hard nosed hold-out negotiations, nationalizations. A settlement with the holdouts and a change of the economic policy team would very likely immediately reduce spreads as Argentine bonds start actually yielding to investors worldwide and the prospect of further reform starts looking more likely to investors.
There is very little short-term economic cost for reaching an agreement with the holdouts since it would allow the government to access fresh financing at lower rates and the cost of the settlement will very likely be due in kind, generating only a minor uptick in the total debt level. Someone might debate whether a settlement is economically beneficial for the country in the long term since its cost is very material, but it is very hard to argue against the positive economic short and medium term effect for the new administration.
However, it does come at a political cost since the current administration has portrayed the standoff with the holdouts as a patriotic gesture that generated a lot of empathy with the electorate and will fight any agreement that does not include a significant reduction in the total debt.
Recent comments by Daniel Scioli, the candidate that was perceived as the least likely to settle, confirmed his willingness to negotiate a deal with the holdout debtors. There is a very high probability that a deal will be promptly reached by the next president and this is already partially built into valuations.
All assets would be boosted by such an outcome, both because of its impact in the cost of capital of any Argentine asset and the indirect implications about further reform, but private assets will be boosted less without a softening of capital control restrictions. Were further reform not to happen, the biggest winner of this seldom measure would be sovereign fixed income, since it is the asset that best captures the isolated effect of the settlement.
Investments focused on a change in sovereign risk are an Argentina risk-on/ risk-off bet, and do not aim to profit from dislocations among asset classes within the country. Capital Controls, presented in our next delivery, are a bit more complicated.
There is very little short-term economic cost for reaching an agreement with the holdouts since it would allow the government to access fresh financing at lower rates and the cost of the settlement will very likely be due in kind, generating only a minor uptick in the total debt level. Someone might debate whether a settlement is economically beneficial for the country in the long term since its cost is very material, but it is very hard to argue against the positive economic short and medium term effect for the new administration.
However, it does come at a political cost since the current administration has portrayed the standoff with the holdouts as a patriotic gesture that generated a lot of empathy with the electorate and will fight any agreement that does not include a significant reduction in the total debt.
Recent comments by Daniel Scioli, the candidate that was perceived as the least likely to settle, confirmed his willingness to negotiate a deal with the holdout debtors. There is a very high probability that a deal will be promptly reached by the next president and this is already partially built into valuations.
All assets would be boosted by such an outcome, both because of its impact in the cost of capital of any Argentine asset and the indirect implications about further reform, but private assets will be boosted less without a softening of capital control restrictions. Were further reform not to happen, the biggest winner of this seldom measure would be sovereign fixed income, since it is the asset that best captures the isolated effect of the settlement.
Investments focused on a change in sovereign risk are an Argentina risk-on/ risk-off bet, and do not aim to profit from dislocations among asset classes within the country. Capital Controls, presented in our next delivery, are a bit more complicated.
No comments:
Post a Comment