On the surface, it would appear Argentina offers plenty of
potential for investors. The second-largest South American
economy behind Brazil is also home to, by some estimates, the
third-largest shale gas reserves in the world. Gross domestic
product there grew at an average rate of 7.1% per year from 2003
to 2011.
Those statistics might be enough to send unknowing investors
into Argentine stocks or the Global X FTSE Argentina 20 ETF
(NYSE:
ARGT
), the lone ETF tracking Argentina. Argentina, is designated
index provider MSCI (NYSE:
MSCI
) as a frontier market, a label which implies a higher degree of
risk relative to emerging markets.
As is the case with so many emerging markets, Argentina has a
dark side. That dark side, which has punished the Global X FTSE
Argentina 20 ETF, cannot be ignored. The country's problems
literally come from the top, meaning President Cristina
Fernandez's policies present major risks to investors and
significant hurdles to her country's economy.
That much was highlighted earlier this year when the Argentine
government moved to nationalize energy firm YPF S.A. (NYSE:
YPF
), a move that
pummeled ARGT and led to elevated yields on
Argentine debt
as well as a surge in the prices of credit default swaps to
insure that debt against default.
Now, Argentina's economy is faltering due in large part to
government policies thar are viewed as unpredictable and
inhospitable to foreign investment. Analysts predict Argentina's
economy will grow 2.5 percent to 3 percent this year,
according to the Associated Press
. That comes after first-quarter GDP growth of 5.2 percent.
More alarming is the fact that the central bank is forecasting
growth of 6 percent and the government's budget said 5.1 percent
growth is to be expected. The potential discrepancy between
government estimates and reality would only lend fuel to the
argument that the Hernandez administration is less than
trustworthy.
"Argentina is a basket case and is in need of substantial
economic, political and social reform," said
Colombia-based independent analyst Caiman
Valores
.
That perception is now reality and it could spell bad news for
Argentina's economy in the future. Some of the largest oil
companies in the world, including Chevron (NYSE:
CVX
), have done business in Argentina. However, the nationalization
of YPF can be interpreted by U.S. and European energy firms as a
hostile act and one that says the government does not want
Western investment.
Argentina is also rich in mineral resources and while the
country's mining industry is less regulated than its oil
business, there is still an export tax of 10% levied on Argentine
mineral exports, again creating an additional cost for mining
companies operating there,
according to Valores
.
"The political risk is extremely high and the overall country
risk is extremely high," he said. Valores notes that on a one to
10 risk rating for investors, with 10 being most risky, he would
give Argentina a nine.
The impact of Argentina's politics on ARGT has been palpable.
When news of the YPF nationalization first broke, the ETF had
$3.5 million in assets under management. That total had fallen to
$2.8 million as of June 20.
The materials and energy sectors combine for almost 42 percent
of ARGT's weight, making the fund vulnerable to any future
efforts by Fernandez to further nationalize those sectors. Said
another way, it is not surprising ARGT has plunged almost 27
percent in the past three months.
That performance belies the fact that ARGT is actually home to
some decent and familiar stocks. Take Pan American Silver
(NASDAQ:
PAAS
), Silver Standard Resources (NASDAQ:
SSRI
) and Yamana Gold (NYSE:
AUY
). That trio combines for 12 percent of ARGT's weight. In the
past month, Yamana is the worst performer with a gain of 17
percent. Over the same time, ARGT is up just 2.3 percent, further
proof this ETF is being hamstrung by Argentina's unfavorable
regulatory climate.
The bad news does not end there. In its annual market
reclassification unveiled on Wednesday, MSCI
noted Argentina could be removed from the MSCI
Frontier Markets Index
.
"MSCI continues to monitor closely the situation in Argentina
following the nationalization of YPF through the "expropriation"
of a 51% stake from the Spanish company Repsol by the Argentinean
government," the index provider said in a statement. "Any further
such government intervention in the "free‐market" economic system
may force MSCI to launch a public consultation with the
investment community on a potential exclusion of the MSCI
Argentina Index from the MSCI Frontier Markets Index."
ARGT does not track the MSCI Argentina Index, but the loss of
that index' frontier markets status could bring about more black
clouds for the ETF.
There are glimmers of hope, though. At less than $8, investors
with a high tolerance for risk can treat ARGT as a no-expiration
call option on a dramatic improvement in Argentina's political
climate sometime in the future.
"There are high-potential investment opportunities for
speculative and canny investors," Valores said. "Especially those
that are willing to ride the boom/bust cycle the Argentine
economy operates in."
For more on Argentine stocks, click
here
.
(c) 2012 Benzinga.com. Benzinga does not provide investment
advice. All rights reserved.