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Will Tough Times Persist for Argentina ETFs?

Zacks Equity Research
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The Central Bank of Argentina raised its key interest rate to 60% in an unscheduled meeting on Aug 30 to cope with the foreign exchange situation and risk of greater inflation.


The Argentina economy is on the verge of recession as it shrank 6.7% in June from the same period last year, representing the largest year-over-year decrease since July 2009. 


This also marks the third straight month of year-over-year decline, following the contraction of 5.2% in May and 0.6% in April. The first half of the year saw a decline of 0.6% year over year (see all Frontier Markets).


The economic decline is partly attributable to the devastating drought that hit the country in early 2018, hitting the agriculture sector. In June, the agricultural sector fell by 31% from the same month last year. Retail and wholesale commerce fell by 8.4% and manufacturing declined 7.5%. As per the country’s Treasury minister, the economy is expected to contract 1% in 2018 but grow at least 1.5% in 2019.


The Argentina peso depreciated nearly 13% against the dollar on Aug 30. The peso is down more than 108% against the dollar since the start of 2018 (read: Treasury ETFs Surge Amid Turkey Crisis).


Economists had a view that the peso was overvalued. This was accepted by the government, which sought to depreciate the currency gradually over the coming years. Argentina peso has hit an all-time low to the greenback as the apex bank of the country auctioned $100 million in reserves at an average price of 31.2592 pesos per dollar on Aug 28. In aggregate, $12.78 billion has been sold in the foreign exchange market as the monetary policy makers tried to revive the peso.


This level of depreciation makes the country’s dollar debts more expensive and draws question of how Argentina will be able to meet its $82 billion financing needs for 2018 and 2019 (read: ETFs Buoy on Booming Q2 Corporate Profits: 5 Best Charts)


The job market is under the radar as the Argentine government will cut down on infrastructure spending to curb its budget deficit as per the deal with IMF. Poverty has increased because of inflation and economic downturn as the count of registered workers is falling from its peak last December.


The 12-month inflation rate has reached 31.2%, about 10 percentage points above the IMF’s 2019 target. The month of July saw consumer prices rise 3.1%.


Corruption scandal has raised concerns in the construction sphere as more checks will be involved in future government works. The government is on track to meet IMF’s fiscal deficit target for 2018 at 2.7% of the year’s GDP and expects the current account deficit of 3% of GDP in 2019.


Argentina has asked the IMF to release $3 billion out of the previously agreed$50 billion standby financing in September to cope with the trying times the economy is going through.


With recession looming in Argentina, the following ETFs face a tough time ahead:


Global X MSCI Argentina ETF ARGT


It tracks the MSCI All Argentina 25/50 Index. This fund invests in the largest and most-liquid securities with exposure to Argentina. There are 28 holdings in the basket with   Mercadolibre Inc MELI occupying the top weight with 28.12%, the next best being Tenaris SA TS with 15.73%. It has an AUM of $98.3 million and an expense ratio of 0.59%. The fund has lost 7.56% over past month. It has a Zacks ETF Rank #4 (Sell) with a Medium risk outlook.


ishares MSCI Argentina and Global Exposure ETF AGT


It also tracks the MSCI All Argentina 25/50 Index and provides broad access to stocks with exposure to Argentina. There are 28 holdings in the fund pool with Mercadolibre Inc and Tenaris SA having the top weights with 29.04% and 15.47%, respectively. The fund has recorded losses of 8.46% over past one month. Its AUM is $23.5 million and expense ratio is 59 bps. It has a Zacks ETF Rank #3 (Hold).


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MercadoLibre, Inc. (MELI) : Free Stock Analysis Report
GLBL-X MS ARGEN (ARGT): ETF Research Reports
Tenaris S.A. (TS) : Free Stock Analysis Report
ISHRS-MSCI ARG (AGT): ETF Research Reports
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