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Politics Still Problematic For The Argentina ETF

It's a familiar refrain in politically volatile Argentina: politics and shoddy sovereign finances often impact financial markets in South America's second-largest economy and that has been the case again this year.

What Happened

Just look at the Global X MSCI Argentina ETF (NYSE: ARGT). The oldest and largest Argentina exchange traded fund listed in New York was on a torrid pace through the first seven months of 2019 only to fall on hard times falling a primary election that pointed to a new market unfriendly regime coming to power.

Stocks there have yet to recover as highlighted by ARGT residing almost 34% below its 52-week high and recovery will be difficult against the backdrop of another economic crisis.

Why It's Important

“The country suffered severe financial deterioration after the August 11 primary elections, which showed an increased likelihood of victory by the opposition presidential candidate,” Fitch Ratings said in a recent note. “Increased prospects of policy discontinuity and further deterioration of macroeconomic conditions in Argentina could present significant credit risk for Argentine cross-border corporate issuers.”

Further plaguing ARGT is concentration risk in the form of a 22.50% weight to Latin American e-commerce giant MercadoLibre (NASDAQ: MELI). That stock hasn't recovered from its slump after the Aug. 11 election results and with earnings looming on Oct. 31, investors could make another comment on the health of the Argentine consumer and further punish ARGT's largest component.

That's a reminder of ARGT's heavily cyclical tilt. The fund holds 26 stocks, about 45% of which hail from the consumer discretionary and energy sectors.

What's Next

Adding to the potential risks around ARGT are credit issues facing some of the fund's holdings.

“Fitch's rated portfolio faces high refinancing risk with two issuers, YPF and IRSA Inversiones, facing material cross-border bond maturities in 2020,” according to the ratings agency. “Fitch believes the current controls and risks of further tightening could potentially impair the private sector's ability to access hard currency to meet debt service, despite exceptions included in the controls for debt repayment. Refinancing risk is also elevated for bank loans and working capital facilities, as most financial institutions are not increasing exposure to the companies.”

YPF is ARGT's fifth-largest holding at a weight of 4.44%.

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