Argentina's Economy Has Bottomed Out, But Which Stocks Are In The Driver's Seat? 1

Argentina has bottomed out

Good news for investors in Latin American (ILF) equity. The economy of Argentina has already bottomed out, and the outlook points northward from here. After three consecutive quarters of negative growth on account of the currency devaluation and rampant inflation affected spending and investment in this emerging (EEM) (VWO) economy, the country has been recording positive economic growth in the recent quarters.

For 4Q16, the economy grew by 0.5% over 4Q15. After shrinking by 2.3% in 2015, analysts now forecast the economy to grow at 3% in 2017. Argentina Finance Minister Nicolas Dujovne predicts sustained GDP growth this year. In his “Macroeconomic Panorama” report, he said that GDP growth will be driven by consumer spending estimated between 3% and 3.6% in 2017.

Industries such as farming, construction, and energy are expected to remain in focus. Contribution from industries such as auto manufacturing may remain muted.  Production in the automobile industry in Argentina declined by 30% in 2016.

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The Argentinean capital market has also seen a good run so far in 2017. The Global X MSCI Argentina ETF (ARGT) had returned 19.7% YTD 2017 (as of March 24), outperforming broad Latin American and emerging market equity performance. The iShares Latin America 40 ETF had returned 14.2% YTD, while the iShares MSCI Emerging Markets ETF (EEM) gained 13.7% during the period.

At the sector level, the top performing sectors in Argentina (on the capital market) so far this year, have been industrials, utilities, and financials.

Moreover, Argentina’s benchmark Merval index currently trades at a forward P/E of 12.3, relatively low as compared to its Latin American (ILF) peers such as Mexico at 15 and Chile at 13.6 as of February 15, 2017.

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