Investment outlook for Argentina - BBH

Investment outlook for Argentina - BBHAnalysts at Brown Brothers Harriman offered an investment outlook for Argentina.

Key Quotes:

"The peso continues to underperform after a poor 2015 and 2016.  In 2015, ARS lost -35% vs. USD.  This was by far the worst performer in EM, followed by BRL (-33%), ZAR (-25%), COP (-25%), and RUB (-20%).  In 2016, ARS lost -19% vs. USD and was again the worst performer, followed by TRY (-17%), MXN (-17%), and CNY (-6.5%).  So far in 2017, ARS is up 1.3% YTD and is in the bottom half of the EM pack.  

The peso has stabilized in the 15.50-16.00 range since late November.  With inflation remaining high and the US dollar rally seen resuming, we believe the peso will come under pressure again.  Our EM FX model shows the peso to have VERY WEAK fundamentals, so this continued underperformance is to be expected.

Argentine equities have outperformed this year after a decent 2016.  In 2016, MSCI Argentina was up 2% while MSCI Frontier was -1%.  So far in 2017, MSCI Argentina is up 25% YTD and compares to an 8% YTD gain for MSCI Frontier.  We believe that as the government continues to open up the nation, strong growth prospects will attract foreign equity investment.  

Argentine bonds have outperformed.  The yield on 10-year local currency government bonds is about -215 bp YTD.  This is the best performer and is ahead of next best performers Brazil (-82 bp), the Philippines (-38 bp), and Indonesia (-36 bp).  With inflation likely to continue falling, we think Argentine bonds will continue outperforming.  

Our own sovereign ratings model shows Argentina’s implied rating at B/B2/B.  We view Fitch’s B rating as right on target, but believe there is upgrade potential for S&P’s B- and Moody’s B3 ratings."