Losing Ground: Waning Net Inflows Show Interest In Argentine Equities Is Receding

Argentine equities have been among the leaders in returns within the frontier markets universe in YTD 2017. The Global X MSCI Argentina ETF (ARGT) – one of two funds traded on US exchanges which provide exposure to Argentine equities – has risen 24% this year until August 7.

The fund has been powered by the information technology sector which has contributed to a little less than half of the ETF’s total returns. The primary driver of the sector’s performance has been a company named Mercadolibre, Inc. (MELI).

Financials are a distant second to information technology in terms of positive contribution to the fund and have been led by Grupo Financiero Galicia S.A. (GGAL) and Banco Macro S.A. (BMA).

Investor interest can also be gauged from the graph below.

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It plots the outstanding shares of the ARGT and the flows witnessed by the fund in YTD 2017. Looking more closely, it also reveals a recent trend whereby investors may be losing interest in Argentine equities.

Losing ground?

The performance of the fund and its shares outstanding have seen a clear rise since the end of last year, as shown by the graph. But both have dipped noticeably from their peaks earlier this year.

Until August 7 this year, the returns of the ARGT had reached their peak at 35% in mid-May, and they were above the 30% mark as recently as mid-July.

Meanwhile, though net inflows to the fund at $36.6 million for the year are sizable for a frontier market, just a month ago, they had stood at $66.5 million, according to Bloomberg data. The fund saw massive outflows in the latter half of July, resulting in the sharp reduction in the size of net inflows. Outstanding shares of the fund have also dipped concurrently.

Why the decline and will the impact continue?

The primary reason for the decline, which is expected to continue impacting Argentine equities in the short-term, is political uncertainty.

President Mauricio Macri’s economic reforms have received a positive response from the investment community, but local residents have been furious due to tough decisions on reduction in subsidies, which have made life difficult.

The situation for Macri has been exacerbated by former President Cristina Fernandez de Kirchner’s decision to run for a Senate seat in the upcoming mid-term elections in October. The country had primary elections on August 13th, the outcome of which could provide a peek into the electorate’s mindset regarding a possible outcome later in the year.

Worries over Kirchner’s comeback, under whose regime Argentina was a closed economy, has spooked investors, and its impact can be seen on the Argentine peso plotted in the graph above. The currency has weakened considerably against the US dollar since mid-June.

Apart from indicating weakening investment sentiment, the declining peso has had an adverse impact on equity investors in the country from the US as a strong dollar has decreased their returns.

If Kirchner wins a Senate seat in October, it will put her in the running for President in the 2019 elections and could stall Macri’s reforms – a development which would hurt investment into the country.

However, a win for Macri would have the opposite effect and when coupled with MSCI’s decision not to upgrade the country to the status of an emerging market, could provide investors a buying opportunity in the interim in which markets can be expected to remain volatile.

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