THE FEW, THE BRAVE, THE SOROS

Investment analysis is key to any sound portfolio-management strategy. To analyze any investment one must look at many factors including: price, expected income, expected time horizon, and the reasons for making the decision at the time. The list could go on and on, but a single number holds more power than all the rest: the entry price.
By most measures Argentine bonds and equities are undervalued but very few are yet venturing—and while George Soros might be an exception by adding over US$ 200 million shares of YPF last week to his holdings— most prominent investment funds are still staying on the sidelines. Last February, the London based newspaper The Telegraph (not precisely the best source for financial analysis) produced a special league table ranking 55 nations with the potential for company stocks to raise according to “value” during the next ten years. However, what was striking about this articlewas that Argentina, Latin America’s 3rd and the world’s 27th largest economy, wasn’t even included in their list.
In fact, most foreign investors are worried enough and are still keeping at a distance and the country remains massively underinvested (see graph below). While Argentina remains in “selective” default—Standard & Poor’s recently lowered its sovereign rating to CCC-, nine levels below investment grade and the lowest rating for any nation that it currently covers—few capital inflows are likely to be expected. Moreover, Argentine bonds are currently yielding over 800 basis points over Treasuries, the second highest borrowing cost in all of Emerging Markets, after Venezuela.

A month ago, I was at a meeting between one of the largest retail companies in South America and a Canadian based real estate investment firm looking at expanding their investments within the region.
When asked by the Canadians about their expansion plans, one of the shareholders replied, “We still see opportunities in Chile, but our main focus for the next few years are Peru and Colombia. Brazil is too complex as a market for us and Argentina doesn’t exist.”

The financial sector provides a clear-cut example of just how undervalued Argentine assets are today. As you can see in the above graph, they are priced at half the P/E multiple of its Chilean and Brazilian comparables and almost a third of its Colombian peers. Furthermore, the Argentine financial sector is significantly undeveloped and there is ample room for rapid growth, since private credit represents only 15% of its GDP comparable to Chile´s 101%. We therefore find that there is significant upside via de-risking and top-line growth.
In conclusion, the world has forgotten about Argentina and rightly so. But the fact remains that Argentina will not remain a “Frontier” market for long, and sooner rather than later investors will realize that this market is underinvested and undervalued.

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