Argentina’s aversion to austerity, and your investments

Six ways from Sunday

The Argentinian populace recently voted a resounding NO to austerity. In turn, investors voted a resounding NO to Argentinian financial securities. The August 11th primary election, which doubles as a public political poll and triples as a gate of entry to the general elections later this year in October, was followed on August 12th by a sell-off in the country’s MERVAL stock exchange so severe that it lost 38% of its value…in one trading day.

The MERVAL’s drop on the first trading day of the week following the country’s primary election results from Sunday, August 11th. Courtesy of TradingView.

For the sake of comparison, The DOW would have to drop from current levels to roughly 16k by EOD tomorrow, though that wouldn’t even be allowed to happen because of the market circuit breakers in place.

Argentinian bank stocks plunged over 50%, including BBVA Banco Frances SA (BBAR) and Banco Macro SA (BMA), while country-specific ETFs like Global X MSCI Argentina (ARGT) trading on the NYSE Arca lost close to a third. Government bonds have sold off. The peso got hammered and remains in crisis territory. Social media users from the beleaguered nation are already decrying the impending assault of further inflation and loss of purchasing power they will probably encounter.

However, there is a host of investments where the impact is not so obvious, but is no less felt. Many companies conduct mining operations in Argentina, for instance. Take Yamana Gold Inc. (AUY), a precious metals miner based in Canada. This past Monday, while gold, the commodity itself, continued its climb, Yamana — which had been rewarding investors handsomely as a proxy for the yellow metal since June — experienced a pullback for no apparent reason.

Except, the company so happens to have gold operations in Argentina. Since the party which swept the primaries is leftist, the danger to outside investors and multinational corporate interests (beyond the uncertainty of an unknown in the president’s seat) is that Argentina’s resources will be nationalized and foreign companies kicked out. This has happened elsewhere.

Then there are funds which hold Argentinian debt of one kind or another. The Pimco Income Strategy Fund II (PFN) invests in Argentina Treasury bills as well as a corporate bond of a bank with operations there. It spent most of last week declining in price.

In this globalized world, there will be even murkier connections to Argentina’s plight. Think some holding company of some parent company of some business with a subsidiary operating in the country. Or, the corporation which provides mining equipment to Yamana.

The best defense against all this is good old portfolio diversification. But, if you really must get more granular than that, you can short a country-specific investment vehicle such as one of the aforementioned banks or ARGT (though it’s not that liquid of a security, relatively speaking) via selling them short or buying put options expiring after the country’s general election scheduled for October 27th (though the endgame may be to sell them prior to the election, if profitable). Alternatively, in order to hedge against the sovereign debt crisis that Argentina’s situation may turn into yet again, you can take a page out of the playbooks and short the currency (ARS) with any broker that will allow you to trade forex.

Note that all of the latter options above can be extremely risky, since they are narrowly focused, situation dependent, and uni-directional in nature. Consider the sizes and implications of such positions carefully. Also, there’s no telling what Argentina’s Macri government — or the country’s general public — will do from here on out, never mind how things will unfold after the general election itself.

Mind you, the positions are mentioned here as possible hedging moves, not as standalone trades. On their own, with nothing to hedge, they can be downright dangerous. The peso has already regained a small bit of its shaky ground as Argentina’s central bank commanded the country’s financial system to sell US dollars (USD) into the market this past Thursday, in an attempt to stabilize the peso some. Additionally, Macri announced economic relief measures, including a three-month freeze on fuel prices. Who knows what will come next. Perhaps a new Fernández/Kirchner administration will be disastrous, or perhaps it will be just what the doctor ordered.

Properly diversifying your portfolio, on the other hand, is proven to mitigate risk, although it may cap your expected returns. You make your own bed. At any rate, I wish you success in your trades, whatever they are.



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