Argentina, storms and spirals

28 January 2014

“The financial storm striking Argentina in recent weeks is the result of a complex situation and several different factors. It is even more complex than what we saw in the Nineties, when that tragic downwards spiral led, in 2001, to default.” These are the words of Vittorio Fontanesi, Co-manager of several Kairos Partners funds, a market watcher particularly in tune with trends on the markets that we refer to as “emerging” – but which in actuality have often “already emerged” –  and with respect to which current times see the South American giant making headlines these days.

The financial crisis that President Kirchner is struggling to contain is due to a downwards spiral fueled by a number of factors: first and foremost, underestimated inflation figures issued by the Argentinean government itself, a widening gap between the official Peso/US dollar exchange rate and the black market rate,  the Argentinean central bank’s massive intervention, rising inflation and the consequent panic among Argentineans. Given the memories of past events, this alone would suffice to scare off even the bravest of investors, but add to it the fact that, following the default, Buenos Aires focused most of its economic strategy on the production and export of soy and grains, raw materials whose prices have recently taken a tail dive. This has further tipped the trade balance, necessitating dramatic intervention by the country’s central bank.

Nevertheless, the crisis would remain, all things considered, within the country, if it didn’t play such a key role as Brazil’s economic partner in the Mercosur (the South American economic community of Argentina, Brazil, Paraguay, Venezuela and Uruguay): indeed, trade between the two countries totals US$ 15 billion, and this importing/exporting conditions their strategies and forecasts, at least in part. “The country has seen explosive growth in consumer credit in the past decade, and this kind of lending is nearly always at floating rates, meaning any depreciation of the Real would cause debt refinancing costs to skyrocket.”

As a result, concerns surrounding Brazil surpass those for Argentina, but the manager has kept a close eye on emerging markets for some time as they come out of two decidedly weak years. “These are markets that have undergone significant imbalances in recent years, and only a few are performing well. This explains why the entire Kairos team of managers is preaching prudence in this area and insists on the need to evaluate investments on a case-by-case basis.” Fontanesi’s advice? “Invest light so you can acquire after the storm has passed, when many investors will still be tied up in their losses.”