Argentina has proven somewhat of a problem child for emerging market investors in recent years and moves to devalue its currency against the US dollar have added further woes.
But how can emerging investors now navigate this turbulence? Here, Citywire Global has collated the views of leading fund managers to understand the extent of the damage and the next steps for the South American economy.
In the eyes of Baring’s head of Latin American equities, Mike Simpson, the furore over the moves to devalue the currency is overblown given its track record.
‘In our view, developments in Argentina will have a minimal impact on international capital markets, as the country has never fully returned to global debt markets after its sovereign bond default in 2002,’ he said.
Simpson added that the impact on global markets would be relatively muted and not effect trade far beyond Argentina’s near neighbours, who are also its largest trading partners.
‘Notwithstanding our expectation that the economic effects of the sharp peso devaluation will remain relatively contained, from a sentiment standpoint volatility in the market does little to help confidence at a time when risk aversion toward emerging and frontier markets appears to be on the rise.’
While Simpson has no exposure to Argentina in his Latin America fund, he said he would be holding an underweight to companies with indirect exposure to the market.
Time for some 'shock therapy'
Emerging markets bond expert Phillip Blackwood believes Argentinian politicians will make no proactive efforts to limit the wider impact of the currency devaluation.
‘As usual the option chosen by the Argentine politicians is to muddle through – doing as little as possible, sticking their heads in the sand and never really tackling the issues at hand.’
Calling for more willingness to address the current direction of its monetary policy, Blackwood said more could be done to ensure a weakened currency does not further push investors away from a market.
‘They should of course bring credibility to their garbage inflation numbers, introduce some shock therapy and clear out the issue with the bond holdouts in order to regain market confidence and thus achieve the greater prize of a return to the international bond markets.’
‘That is the only long-term solution which will allow them to finance sustainable growth in its export market and its domestic economy. Anything else is just buying time, whilst building up huge imbalances in the interim.’
Turn on the US dollar taps
With the erosion of US dollar reserves at the heart of the problems, Mark Mobius, Franklin Templeton’s emerging markets veteran, said the country has to make itself more attractive to investors using the US dollar.
‘In our view, one of the objectives of the policymakers must be to abolish the capital restrictions so that US investment dollars are encouraged to enter the country,' he said.
'There is a considerable pressure on reserves, and I think the government cannot allow that unless it is able to convince investors to remain in ARS [Argentinian Peso].’
Mobius said the government should allow interest rates to rise, which is the only way to stem the rush of outflows.
‘The timid ease in the restrictions to purchase USD for retail investors appears to be an attempt to reduce the demand in the parallel market that provides the basis for the gap between the official and the parallel rate.’
Further to this, Mobius called for a fiscal adjustment in the country.
‘I think the government must freeze public spending and apply a brave utility rate adjustment,’ he said. ‘In combination with the devaluation, the flow of ARS to the system must be restricted or investors will continue to believe that the recent devaluation was not the last one.’