The Global X MSCI Argentina ETF (NYSEArca: ARGT) and the iShares MSCI Argentina and Global Exposure ETF (BATS: AGT) are both sporting double-digit year-to-date gains, but some analysts see lingering fiscal risks for Argentina’s economy.
Argentina, South America’s second-largest economy behind Brazil, is facing recession pressure, including high cost of credit and slack demand.
“The Argentine peso showed appreciating pressure in January 2019, dropping below the Central Bank’s (Banco Central de la República Argentina: BCRA) no-intervention range and prompting the bank to purchase hard currency and to relax monetary policy,” said Markit in a recent note. “However, the monthly inflation rate re-accelerated in February, leading the annual rate to be above 51%. Meanwhile, the manufacturing sector posted a double digit annual decrease in January. The tight credit conditions, the high cost of inputs, and the reduced demand are taking a toll on economic activity.”
ARGT, the older and the larger of the two Argentina ETFs, tracks the MSCI All Argentina 25/50 Index. The fund debuted just over eight years ago. ARGT holds 26 stocks, but the fund is top heavy as it devotes 27.31% of its weight to Latin American e-commerce giant MercadoLibre (NasdaqGS: MELI).
That means ARGT allocates over 30% of its weight to the consumer discretionary sector, a group that could be pinched if Argentina slides into a deep recession. Weighing on economic activity are Argentina’s interest rates, which are among the highest in the world.
“These extreme interest rates are keeping credit in local currency down, with loans to the private sector declining in real terms in 2019. The high interest rates and the currency instability have led to an increase in the dollarization of credit in the banking system,” according to Markit.
Argentina holds national elections later this year, meaning incumbent politicians there would like to bolster economic growth as soon as possible.
“The Macri administration is under mounting pressure to restore economic growth before the presidential elections in October 2019,” said Markit. “The risk of loosening the monetary policy too fast, before the inflation rate is on a more sustainable path, has temporarily diminished since the February currency volatility; however, it is still significant, and it will expose the country’s vulnerabilities that have not been comprehensively dealt with since the 2018 confidence crisis.”
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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.