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Is the Argentina ETF a Good Buy Ahead of Runoff Election?

Zacks Equity Research

Argentina has been on investors’ radar lately for the much-awaited election results that can make or break its fate for the coming four years. The country’s economy is in dire straits with cooling growth, higher inflation, declining currency and debt default issues. Naturally, a probable change in political power, which might bring about a shift in economy policies, has drawn investors’ attention.

 

In such a backdrop, a poll was held on October 25. But the election did not led to a clear winner and thus led to a runoff. Notably, Argentina’s leaving leftist president Cristina Fernandez was constitutionally debarred from fighting for the third successive term and her party’s candidate shocked with a feeble performance.

 

And Conservative opposition’s pro-business candidate Mauricio Macri's unexpected strength in the poll box set the stage for a runoff on November 22. Marci will rival FPV candidate Daniel Scioli who is in fact backed by Cristina Fernandez. The first round of election was a neck-to-neck competition with Daniel Scioli getting 36.86% and Macri receiving 34.33% votes.

 

Sergio Massa, a past partner of Cristina Fernandez de Kirchner who shifted allegiance to the opposition, could be the wire-puller after capturing 21.34% of the votes, with analysts suspecting that he might tie up with Macri to form the government, as per nytimes.

 

Since, Mauricio Macri is viewed as a proponent of free markets; a runoff lifted the Argentine equities. However, citizens are receiving online warnings that they might lose out on social welfare if Macri wins.

 

Basically, Scioli has a leftist approach. He is thus repeatedly referring to the free-market policies of the 1990s that led to the 2002 economic crisis, per Reuters. However, Macri’s political pledge is to revamp investment and curb inflation while simultaneously maintain the required social programs.

 

Market Impact

 

As the first round of election went against the opinion poll and Mauricio Macri emerged as a dark horse to capture the close second position, investors started to look for growth prospects in Argentina. Several analysts went long on these stocks. The only ETF targeting the nation – Global X MSCI Argentina ETF (ARGT) – added about 22.9% in the last one month (as of November 2, 2015), of which 11.7% returns came in the last 10 days (see: all the Latin American ETFs here).

 

Can it Run Further?

 

The second round of elections will take place on November 22. And with Scioli still maintaining the lead, hopes are still alive for him to win. Sergio Massa’s 21% voters will matter the most now as they could swing the balance.

 

 If Macri wins, the Argentina ETF is sure to see a nice spell of rally. If not, then also the stocks will likely enjoy a decent run on hopes of a political change ahead of the runoff election. Investors should also note that Scioli is apparently more market-friendly than Fernandez under whose governance, Argentina’s growth slackened. So, no matter who wins, Argentina ETF might see a rebound in the near term.

 

Argentina ETF ARGT is still 13.7% down from the 52-week high (as of November 2, 2015) and thus has room for further advancement, if speculations over Macri’s win persist. So investors with a strong stomach for risks can take a look at ARGT. The fund presently has a Zacks ETF Rank #5 (Strong Sell) with a High risk outlook. Let’s wait for November 22 to see what lies ahead for the Argentina ETF in this uncertain time (read: 3 High-Risk Country ETFs to Avoid Heading into 2015).



ARGT in Focus

 

The ETF tracks the MSCI All Argentina 25/50 Index, which measures the performance of the 30 largest and most liquid companies that are listed in Argentina or perform most of their operations in Argentina. Holding 30 stocks in its basket, the fund is highly concentrated on the top four firms at 60% while other firms do not hold more than 5.68% share. The fund has amassed $15.2 million in its asset base and trades in average daily trading volume of nearly 12,000 shares. The product charges 74 bps in fees and expenses (read: Top and Flop ETFs of October).

 

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