Quiet as it has been kept, the embattled Global X FTSE Argentina
20 ETF (NYSE:
) jumped over 10 percent in the past month prior to the start of
The catalyst has been a strong rally in Argentine sovereign
debt, which was under heavy pressure late last year as speculation
swirled the South American country could be headed for its second
defaullt this century
The catalyst for the rise in Argentine bonds is,
as Barron's notes
, speculation that a recent decision by a U.S. judge that Argentina
must pay bondholders $1.5 billion will be hard to enforce.
The Bank of America Merrill Lynch Emerging Markets Sovereigns
Argentina USD Index has surged 29 percent since November 29,
according to Barron's. Said another way, since November 29,
Argentine sovereign debt has been nearly three times the investment
that ARGT has been.
Another reason ARGT may be getting a lift is valuation. As in
Argentine equities as measured by the MSCI Argentina Index, not the
index tracked by ARGT, trade at just
four times forward earnings
. That means Argentina's equity market is far less expensive than
rivals in Brazil, Chile, Colombia and Peru.
However, value in Argentina could be more a case of value trap
than anything else. Barron's cites a Citigroup research note that
says the chances of the U.S. ruling in favor of the bondholders is
unlikely to be overturned and "the chances of a technical default
still remain high."
Argentina equity bulls, presumably a group small in population,
could point to the fact that ARGT is in rally mode and that the ETF
devotes 36.5 percent of its weight to consumer staples stocks. That
would imply a certain degree of insulation from macro events. While
there is no refuting ARGT's recent bullishness and a presumably
favor sector weight, there is also no refuting the fact that
Argentina is nowhere close to out of the default woods.
has been previously mentioned
, another sovereign default could easily be the last straw that
leads index providers to revoke Argentina's frontier market
) has already cautioned that is a real possibility as has FTSE
Group, the provider of ARGT's underlying index. What type of
purgatory awaits countries that are demoted from frontier market
status remains to be seen, but it is also clear that those types of
headlines have weighed on ARGT in the past. Translation: ARGT could
be 100 percent allocated to consumer staples and still be
vulnerable to downside caused by rising bond yields as well as the
loss of the frontier market status.
With headline risk high and an anti-free market government still
in place, Argentina's economy and equity markets represent
high-risk bets. Those looking to participate in potential upside
without the commitment of an "all in" Argentina bet should consider
the iShares MSCI Frontier 100 Index Fund (NYSE:
). FM features a modest allocation of about three percent to the
South American nation.
For more on
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