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Interview - Cheap Valuations Look Tempting In Argentina

Tom Burroughes Group Editor May 5, 2011

Interview - Cheap Valuations Look Tempting In Argentina

Argentina has been through difficult economic times but it is still the second biggest LatAm economy and there are signs that developments are turning more positive, an investment firm argues.

Editor’s note: The Latin America market is fast gaining ground as one of the most important growth areas for wealth managers, with local and overseas firms increasing their presence. We welcome further contributions from firms developing strategies in this area.

One of the ways that hedge funds and long-only managers seek to profit is by spotting unloved markets, hoping yesterday’s ugly duckling turns into a swan. And arguably, Argentina, often wracked by political shenanigans and high inflation, is a country where this approach might just pay off.

The country does not feature on many investors’ wish lists. In early 2009, Morgan Stanley Capital International – the provider of the influential MSCI indices of stocks and other markets – kicked the continent’s second biggest economy off its benchmark Latin America index, relegating the country to a “frontier” index instead. The shift meant that some fund managers dumped Argentine assets.

As far as Ricardo Maxit, chief investment officer at Copernico Capital Partners, is concerned, valuations in the Argentine market are a tempting proposition. However, as the Argentina-headquartered firm would argue, investors need locally acquired close knowledge to find true bargains.

CCP, in partnership with UK-based AdvanceEmergingCapital, recently launched the ACAF fund (Advance Copernico Argentina Fund). It is a long-only, equity-only portfolio and represents a bit of a departure for Copernico, which had previously been a hedge fund specialist. The fund has monthly liquidity and carries a 1.5 per cent management fee, with a performance fee 15 per cent over the MERVAL Index, subject to a high water mark. The fund’s initial capacity is relatively modest: $50 million.

“This was something different; all of a sudden, we had to be fully invested, 100 per cent of the time and only in equities,” Maxit told this publication by telephone from his office in Buenos Aires.

There have been small inflows into the fund so far, but plenty of expressions of interest, he said. The firm is talking to intermediaries and direct to potential investors about the opportunities, Maxit said. There is no minimum investment size for the fund. It is registered and domiciled in the Cayman Islands, offering monthly liquidity.


“Despite various problems, the Argentine economy has grown at an average of 8 per cent for the last five to six years. It has been undergoing a tremendous de-leveraging process. What is happening with Argentina is that valuations are extremely compelling and they remain so,” he said.

Argentine equities have a price-earnings ratio, based on expected 2012 earnings, of 8.2 times, with an expected corporate earnings forecast, based on a compound annual growth rate for the same year of 14 per cent. That compares with Brazil’s P/E ratio for 2012 of 11.6 times, with an earnings forecast of 23 per cent. The Latin American average P/E ratio for 2012 is 12.2 times forward earnings, with an earnings forecast of 22 per cent. So Argentina earnings are seen as not as hot as those for the continent as a whole, but they are currently pretty cheap.

“When you buy an equity in Argentina, you are getting very close to the bone of a company. There is not leverage at all. If you look at the replacement value [companies], this costs more than the asset value,” he said.

“Argentina has been out of the markets for many years so coverage from the sell-side has been minimal. Other countries have had a much easier ride,” Maxit continued.


Political doubts explain some of the hesitancy of investors about Argentina, said Maxit.

“There is tremendous political uncertainty [in Argentina at the moment ahead of forthcoming general elections]. The elections are next due in October, 2011. (The most probable political scenario for Argentina’s October 2011 presidential election is a run-off between two candidates from the hegemonic Justicialista party, centre left and centre right, according to Argentine historian and political analyst Rosendo Fraga, as reported by press reports).

Regardless of the specific outcome, there will be fiscal and inflation constraints on any new administration, which will likely force any government to tighten policy and rein in any deficit, he said.

Economic conditions are not easy; while public debt as a proportion of Argentine GDP is not as bad as at some countries, at 45 per cent, inflation is currently in the 25-30 per cent range.

Liquidity and turnover is improving, however. The recent sale by Repsol of YPF is an example. Argentina ADRs (American Depositary Receipts) are traded in New York; daily turnover has expanded quite fast in the last few months.

Maxit realises that this new fund is hitting the market at a time when Latin America has been grabbing some more limelight. At the start of this week, for instance, Julius Baer, the Swiss private bank, announced it has agreed to buy a stake in a Brazilian wealth manager; Citigroup and JP Morgan, to name just two big US banks, have also been stepping up their presence across the continent.  

“There are some particular features of the Argentine market. People there save in dollars and put savings abroad, and not just in Argentina. They often keep money offshore in the US and in Switzerland, for example. There are some big firms here – Merrill Lynch’s most profitable private bank operation in the world was in Buenos Aires. Some small Swiss banks have been here for a long while. There is also a preference here for small banks,” Maxit said.

A hedge fund veteran

Corpernico has been a hedge fund business through turbulent times, starting in 1999 at the height of the dotcom boom.  

The four main LatAm countries that the firm invests in are Mexico, Argentina, Brazil, and Chile.

“When we started doing this, it was quite a new approach. That has, however, changed a little bit. In Brazil, there is now quite a lot of competition and a lot of people are now in this business,” he said.

The firm relaunched its Copernico Argentina Fund last year, having shut it to new investors in 2004. “That is a fund with a very flexible mandate,” he said. The hedge fund has about $200 million of assets under management. The fund has an annualised return of 32.4 per cent since inception and holds a mix of debt and equities.


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