Fund managers remain negative on Argentina, saying problems associated with the struggling economy a...
Fund managers remain negative on Argentina, saying problems associated with the struggling economy are being compounded by the devaluation of the Brazilian real, prospects of interest rate increases and uncertainty caused by the forthcoming presidential election.
However, the general consensus is that Argentina's currency will remain pegged to the dollar despite previous talk of removing the Convertibility Plan.
A conference last week hosted by Goldman Sachs in New York and attended by key Argentine leaders dealt with the financial and political situation of the country.
According to the forum, Argentine Market Review July 1999, the widespread consensus was to move ahead in the direction set by the Carlos Menem administration over the dollar/ peso peg. Even a representative for Eduardo Duhalde, the candidate who proposed a debt moratorium to boost growth and the removal of the peg, indicated a U-turn on this stance.
UK-based fund managers were already confident the peg would not be removed, but this has done nothing to alter their negative stance on Argentina.
James Hancocks, emerging markets fund manager at Investec Guinness Flight, said: "Removing the peg would require a constitutional change and people are aware that not having the peso/dollar peg (prior to 1991) is what caused hyperinflation to occur in the first place.
Likewise, Joanna Terrett, assistant director at Martin Currie, says the peg will stay, mainly because everything is denominated in dollars. Any change would have a massive impact on the fiscal deficit.
Stan Dejak, Latin America fund manager at Aberdeen Asset Management, is also reasonably confident the peg will remain in the short term, saying the Convertibility Plan is untouchable.
He says: "With the forthcoming presidential election there was some talk of removing the peg which really spooked the market, but I do not expect to see this in the short term." Phillip Ehrmann, emerging markets fund manager at Gartmore, agrees the speculation caused further uncertainty in the market.
A further blow to Argentina's struggling economy is the knock-on effect from the 30%-40% devaluation of the Braz-ilian real. This is causing trade difficulties and fuelling speculation that Argentina needs to rethink its currency.
Meanwhile, the takeover of Argentine oil company YPF by Spanish-based Repsol has rem-oved this major player on the IFC Investible Index. Argentina represented 4.7% of the index back in May, but following the takeover that resulted in the removal of YPF, it now accounts for 2.4%. This has resulted in fund managers having less investment in the Latin American country.
Gartmore is neutral in its asset allocation to Argentina but was underweight prior to the YPF takeover. Ehrmann says he is negative on this struggling economy but that the oil and gas sector is a positive, benefiting from increased oil prices.
Ehrmann adds: "The fund's major exposure to Argentina is to companies within the oil and gas sectors. These companies are doing well because oil prices are increasing.
Terrett says the negative outlook for Argentina's struggling economy is reflected in the underweight position of the Martin Currie emerging markets portfolio. A preferred stock within Argentina is telecommunications company Perez.
"The management of this company is very good, it is selling off its non-core assets, leaving it to focus on its main business, while using that money to pay off debt.
Hancocks says the Investec Guinness Flight portfolio is underweight Argentina, saying Brazil is a much more attractive prospect because of the good value of stocks.
He says: "There is definite value in Brazil, the Government just needs to get its act together in terms of physical reforms.
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