While major emerging markets benchmarks slumped in May, the Global X MSCI Argentina ETF (NYSEArca: ARGT), the oldest and largest exchange traded fund dedicated to stocks in South America’s second-largest economy, stood out, surging more than 8%.
That is an impressive performance against the backdrop of sliding emerging markets equities. Moreover, ARGT is impressing even as concerns mount about how Argentina’s upcoming national elections could impact financial markets there.
ARGT, which debuted more than eight years ago, follows the MSCI All Argentina 25/50 Index. Argentine stocks have been rallying this year due in large part to the upcoming inclusion in the MSCI Emerging Markets Index. Index provider MSCI announced last year it would promote Argentina to emerging markets status from the frontier markets classification.
“Rising debt, persistent inflation and a protracted recession in Argentina have driven market volatility higher over the last 18 months,” said Global X in a recent note. “In addition to these economic woes, currency weakness and political uncertainty related to the upcoming presidential elections have investors on edge. Yet despite these challenges, Argentina has surprised many as a standout performer against other emerging markets this year.”
What’s Next?
Last year, Argentina agreed to a $56.3 billion financing deal with the IMF when uncontrollable inflation caused its currency to lose half of its value against the U.S. dollar. The country’s leaders agreed to implement tighter monetary policies and austerity measures to control public sector debt and reduce the fiscal deficit.
“This year, Argentine markets seem to be mimicking patterns from the last presidential election cycle in 2015, when after a strong Q1, election-related uncertainty led to a mid-year market downturn,” according to Global X. “Almost on cue in 2019, a 17.3% rise in Q1 was met with a selloff in April after default risk spiked.”
The $85.77 million ARGT holds 26 stocks and is a highly cyclical fund as highlighted by a combined weight of more than 54% to the consumer discretionary and energy sectors, but it is another sector bolstering the local economy.
“Argentina’s agriculture sector encourages much optimism. In April, export sales boosted the peso by nearly 2% at the start of the harvest,” according to Global X. “Dollar sales by corn and soy exporters, and their purchase of Argentine pesos, rose from an average of $60 mn per day in March to a hefty $91.5 mn in April. Projections estimate that the corn harvest will exceed the $3.2 billion in exports from the most recent harvest, while wheat production continues to surge.”
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