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Don’t Cry for Argentina

We’re going to live up to our name today here at Income Without Borders and hop some frontiers (virtually, natch) in pursuit of the juiciest income investing tidbits.

Come away with me to sizzling  and newly flush Argentina, the hot new stop on the great global yield chase.

Argentina was once rich but populism and economic mismanagement have taken a heavy toll over the past, oh, century or so. It has failed to pay its debt eight times in 200 years, and has been shut out of the credit-markets since its then world-record $100 billion default in 2001, which had creditors chasing its assets around the world as recently as three years ago.

But then the candidate of the business establishment upset the Peronist populist in the 20g15 presidential election, and went on to settle with the creditors.

The stock market soared 45% last year on heavy foreign fund inflows, and is up another 28% this year. The economy has been slower to respond, beset by a 25% inflation rate and subsidy cuts aimed at limiting the government budget deficit to 4.2% of the gross domestic product. Growth has been running at a 2% to 3% annual rate so far this year.

All this looked like such a great buying opportunity that some investors (funds, likely) may have actually approached the country about issuing dollar-denominated debt. And not just any debt but a 100-year bond, giving them more leverage to the anticipated recovery and rate declines.

Argentina hurried to oblige. This week it raised $2.75 billion from dollar denominated bonds maturing in 2117. There were $9.75 billion in orders for this paper.

Why? With a coupon of 7.125% and an effective yield of 7.9% based on the issue’s pricing, it would take investors “only” 13 years to recoup their principal. If Argentina’s still honoring the debt in 2031 it’s all gravy from there (minus returns that could have been earned elsewhere between now and then and costs, of course.)

According to The Financial Times, many of the bond buyers might have a much shorter time horizon, extending only about two years or so. If the yield declines by then they hope to flip the bonds and dine off their funds’ benchmark-beating returns.

Meanwhile, President Mauricio Macri seems to have lost some support in the polls, faces a contentious midterm legislative election this year, the likelihood of a fierce Peronist challenge to his re-election in two years and the usual traffic-strangling street protests all the time.

Politically and institutionally, nothing appears to have changed that can’t be unchanged by a single election result. So the fund managers, flush with other people’s money, appear to be betting on the proverbial greater fool to show up and pay up in 2019 or so. They may, Argentina certainly has the potential to do better. But the example of Brazil, where the reformist agenda has been stalled by yet another presidential corruption scandal and stock market gains reversed, is a reminder how quickly faith in particular countries and emerging markets in general can falter.

And on that note expect the Argentinian stock market to take a hit today after global indexer MSCI dashed expectations of a quick promotion from the current frontier designation to an emerging-market one, which might have spurred additional fund inflows.

Yesterday, Russia followed suit, with a sale demonstrating that it retains access to Western debt markets. Neither the slumping oil prices not the threat of additional sanctions on top of those already imposed for its invasion of Ukraine deterred the sale of 10- and 30-year Eurobonds at rates ranging from 4.25% to 5.25%.

But give me French stocks over bonds from anywhere following election results that have given French President Emmanuel Macron a clear mandate to reform the country’s labor laws and other growth-sapping regulations. And with his party and its allies now holding a big majority in the national legislature, action is expected quickly this summer, before union members return from their vacations. That should give French companies and stocks, already riding a cyclical economic recovery across Europe, a further boost. The lone France-only ETF out there has a portfolio yielding about 2% in the aggregate, so income remains a minor part of this story. But modest income and strong capital gains work for me, and likely for you too. Over at Income Millionaire I’ve recommended another European ETF that yields more while spreading the risk across national borders. Join us as we continue to uncover saner investment opportunities than lending to the Argentinian government for the next century.         

 

 

 

 

 


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