Political turmoil in Argentina has hit stock prices and created an enhanced buying opportunity, a number of value-minded investors believe.
Lately, Argentina has been rocked by political infighting. Smoldering hostility between Economy Minister Domingo Cavallo and old-line Peronist opponents escalated into outright confrontations. Part of the conflict seemed centered on how to deal with the weak economy. But another part appeared to be tied to political ambitions; some politicians fear Mr. Cavallo wants to run for president in 1999, which could impede their abilities to do so.
Experts say the most-recent political struggles mounted after the May presidential election, in which Carlos Menem was re-elected. Eventually, infighting led to various charges and countercharges being levied. At one time, many feared Mr. Cavallo would have to resign.
This concern hit the Argentine market. Investors feared devastating effects if Mr. Cavallo - architect of the currency convertibility plan that had stifled the country's inflation - quit the government. Many feared a loss of confidence in Argentina's economy. Potentially, a capital flight could recur, undermining Argentina's convertibility program and severely damage its economy. (A capital flight occurred early this year on fears of a currency devaluation following the peso's plunge in Mexico.)
But by late September, rhetoric seemed to be cooling, and the likelihood of Mr. Cavallo resigning began to fade.
As the dust settled, more investors saw an attractively valued market - one in which stock prices had become even cheaper, even as the weak economy looked poised for some improvement.
As Veronica Berger Collins, senior fund manager with Foreign & Colonial Emerging Markets Ltd., London, put it: "We are positive on Argentina, and we expect to see the market moving upward over the next few months."
Late last month, Baring Securities put out a strong buy recommendation for Argentine stocks, stating now was an "excellent entry point on a one-year view." Baring projects the market index would be 45% higher in one year.
Salomon Brothers, New York, expects a gradual improvement in confidence leading to accelerating economic growth. In a recent report, the firm said that it was "reasonable to expect the MERVAL (index) to trade into the 550 to 600 range within six to nine months, representing an increase of well over 30%." (The MERVAL is an index of 22 Argentine stocks.) John Purcell, Salomon's Latin American equities strategist, believes that "anytime now is a buy" for Argentine stocks.
Moreover, a number of institutional investors either remain bullish or have become more so.
About a month ago, Paul White, manager of the $35 million Latin America portfolio of Atlantic Richfield Co. in Los Angeles, lifted his Argentina weighting to about 10% from about 5%. "Looking over the next six months, I think this is an attractive market," said Mr. White, who likes Argentine banks and utilities stocks.
Although questions remain about Argentina's longer-term sustainable growth, Mr. White is more optimistic for the near term amid expectations that Argentina's economy "is coming out of a severe recession .*.*. which should help the market perform a little better." On the political front, Mr. White is "not very concerned .*.*. because Cavallo will continue with the government for the foreseeable future."
Stuart Quint, portfolio analyst with Montgomery Asset Management, San Francisco, believes the worst of the political noise is over in Argentina - as well as the worst of the economic slump that drove joblessness to about 20%
During the summer, Montgomery had lowered its Argentine exposure - to a still overweighted position - and now wants to increase its weighting again. Attractive valuations in Argentina, including a price-earnings ratio of about 10, are combining with improving liquidity and expectations of economic gains.
In a global emerging markets portfolio, Boston's State Street Global Advisors is maintaining a 7% exposure - an overweighting of four percentage points - to Argentina, said Vice President Joshua Feuerman. On a value basis, he views Argentina as attractive relative to its own history and to emerging markets overall. He expects a stock market rebound as the economy picks up - and the political noise subsides.
With an approximate exposure of 20%, the Templeton Latin American Fund is substantially overweighted to Argentina. Manager Jane Siebels-Kilnes in Nassau, Bahamas, believes "for all practical purposes the (political) war is over," and she expects economic improvement.
She's finding "fantastic companies in Argentina and great bargains" on stock prices. Among the companies she likes are: Transportadora de Gas del Sur, YPF Sociedad and Mirgor.
But everyone isn't bullish. Since February, Clemente Capital Inc., New York, has had no exposure to Argentina, although the firm is keeping an eye on that market.
Gavin Grant, head of Latin American investments for Edinburgh Fund Managers, suggested the firm might lower its weighting to Argentina from its current 17% exposure in a Latin America portfolio. "It certainly won't be raised any more at the moment," said Mr. Grant. "We are deeply concerned that there seems to be a political struggle taking place that certainly has to be resolved and there is no likelihood of it near term, given that presidential elections are four years away. " He is "increasingly cautious about the prospects for a sustainable (economic) recovery."