I usually do the opposite of what others do.
Just a year ago, according to the Wall Street Journal, many investors—like Morgan Stanley, T. Rowe Price, and Ashmore Group—rushed to buy Argentinian stocks as the situation in the country had been improving under the new president, Macri. Their position exposure has been at least 17% of their frontier market portfolios, which is the Argentinian weight in the MSCI Frontier Market Index.
iShares even launched an Argentinian ETF and all seemed well until interest rates in the U.S. increased which made people think more about the risks and made them less attracted to the quick, high interest rate gains in Argentina.
The stock market was doing well and even growing faster than the currency was depreciating.
However, with increased volatility on financial markets since the beginning of 2018, the situation has changed and the trend inverted creating a situation where stocks are going down and while the peso continues to depreciate.
There are a few things to think about when looking at such situations:
- The impact of past speculation.
- The value of real assets.
- Understanding the exposure.
- Looking for great businesses.
The Impact Of Past Speculation
Inflation in Argentina reached 40% at the begin of 2016 and has been consistently above 20% since. However, the Argentinian government has just kept issuing notes in pesos with yields significantly above the inflation rate and the peso depreciation, which attracted a lot of speculators. What is it with people and charts that show price increases?
Nevertheless, the situation changed and usually when that happens, panic creeps in and people try to get out as fast as possible. Mercadolibre (NYSE: MELI), which is the largest position of the MSCI Argentinian Index, dropped 25% which just shows how prescient Benjamin Graham was when he said that we should expect all our holdings to increase at least 50% from their lows and drop 33% from their highs in a 5 year period.
The Value Of Real Assets
What one must understand is that there is a big difference between market prices and actual values. Argentinian land will constantly keep its value even if the price fluctuates, the assets build that produce value over time will produce that value even if the price of what they produce will be volatile.
On the other hand, companies that hold a lot of debt will be in a different situation because their debt costs might rise alongside the rising dollar while their real earnings and revenues might decline.
So, my point is to look at what you get for the price you pay when investing in such a situation. If you manage to find value, then even if there is more panic selling, you simply buy more and increase your returns over the long term but the key is really to find value and get it at a discount.
Such sharp drops often attract wannabe value investors who see past prices and jump in anchoring their value levels to higher past prices which is a quick way to lose money especially if the portfolio exposure is big.
Now, in a well diversified portfolio, an investor who constantly rebalances around their calculated intrinsic values won’t ever have a high exposure to a frontier market like Argentina. Argentina is reassessed each year to again be categorized as an emerging market, but that hasn’t yet happened. So a single digit portfolio exposure to Argentinian assets is sufficient to add a little bit of alpha to your portfolio and improve the diversification, but make sure you buy real value.
Look For Great Businesses
Investors often get distracted by stock prices and forget that people in those countries hit by such crises still eat, still watch television, and continue to live their lives as they did before.
Most of us didn’t even feel the financial crisis that was there in 2009 if you weren’t directly involved or lost your employment. Therefore, the key is to look at the businesses that are and will continue to do well thanks to their good business models and high returns on capital employed no matter what.
As I come from a frontier market and have enjoyed returns above 500% from investing in frontier markets, where nobody else is paying attention, I like to keep an eye on what is going on.
My philosophy is simple: buy great value when most have given up on the country and especially on the stock market as people continue with their lives and things will usually always change for the better.
Will things change for the better in Argentina? Probably, but I don’t know when, so a good start is to look at the best Argentinian investment opportunities in order to see where the value is.