Many people may not have expected that the hottest new transaction on Wall Street recently has nothing to do with cryptocurrency, electric cars, or artificial intelligence. But rather a country notorious among institutional investors for consecutive debt defaults - Argentina
Since the beginning of this year, hedge funds and other fund management companies have started pouring into the Argentine market, betting that President Millet can completely change the country's long troubled economy. Although Miller's reform achievements still need to be tested by history, it is undeniable that the Argentine capital market has indeed achieved substantial returns this year.
The Argentine MERV index has been able to lock in ahead of schedule and become the world's best performing stock index in 2024, while the prices of the country's government bonds are also soaring. Meanwhile, ETFs tracking the MSCI Argentina Index have also risen by over 60%.
Has Miller really restored market confidence?
Millet, who took office in December last year, vowed at the beginning of his tenure to significantly reduce expenses. In the past year, the Argentine government led by him has indeed implemented this policy by stopping public works, reducing fund transfers to provinces, and decreasing large-scale subsidies for public utilities. Millet also took action to narrow the gap between the official exchange rate and the black market exchange rate.
Although Miller's shock therapy has caused widespread economic pain and exacerbated the already high poverty rate - as of the first half of 2024, Argentina's poverty rate reached 52.9%, the most severe level in nearly 20 years. But some achievements have indeed been reflected in recent times:
The inflation rate in Argentina has significantly slowed down from high levels, and Argentina has achieved its first quarterly fiscal surplus in over a decade this year. The data released earlier this month also showed that Argentina's GDP grew by 3.9% in the third quarter of this year compared to the previous quarter, marking the first time the country's economy has achieved month on month growth since entering a recession at the end of 2023.
This has triggered a significant shift in investors' attitudes towards a country that has long been plagued by political turmoil, soaring prices, and government overspending. Since winning independence in 1816, Argentina has defaulted on its sovereign debt nine times, with the most recent one occurring in 2020.
Genna Lozovsky, Chief Investment Officer of Sandglass Capital Advisors, a London hedge fund company, said, "This sharp shift is breathtaking. If Miller's firmly rooted fiscal anchor can be maintained, if this downward trend in inflation can continue, and if the Argentine economy can continue its recovery process, Argentine bondholders should be able to expect substantial returns
Looking back at the past year, Argentina's bonds have indeed rebounded significantly. The ICE BofA Argentine Sovereign Index, a measure of the performance of Argentine dollar sovereign bonds, has achieved a total return rate of approximately 90% this year.
Meanwhile, the Argentine MERV index has risen by 179% as of Thursday, far outperforming a series of benchmark indices in developed, emerging, and frontier markets worldwide.
Perhaps some people believe that the strength of the Argentine stock index has benefited to some extent from the depreciation of the Argentine peso. But in fact, even after adjusting for exchange rate differences, the index's increase in US dollars still exceeds 100%. In contrast, the S&P 500 index has only seen a 25% increase this year.
Argentina has suddenly become a hot commodity on Wall Street
Undoubtedly, the hot performance of Argentine assets this year is benefiting institutional investors who have focused on this "high-risk" emerging market early on.
Aaron Stern, Chief Investment Officer of Converium Capital, said, "Argentine assets are where we have earned the most this year. Generally speaking, I don't like to say 'this time is different', but I believe that the global and domestic environment is more favorable for Argentina than in recent years
Stern pointed out that Converium began purchasing Argentine sovereign bonds shortly after its establishment in 2021. At that time, these bonds were under significant pressure during the debt restructuring in 2020. However, given the low price and the fact that the Argentine government has no obligation to repay its debt in the short term, Converium believes that there is not much room for future decline. On the other hand, the company believes that if the situation in Argentina improves, there is a possibility of significant gains.
According to a person familiar with Shiprock Fund's performance, holding Argentine bonds is helping the company achieve a high return of 34% before November this year. The person stated that this includes bets on Argentine sovereign bonds, corporate bonds, and local debt of Buenos Aires province.
Of course, looking ahead, the Argentine market still has many obstacles and challenges to overcome in the future.
For example, Argentina's shortage of foreign exchange reserves still worries investors. Alessandra Alessi, emerging market bond fund manager at Carmignac, estimates that Argentina's net foreign exchange reserve shortfall is about $8 billion. This has raised concerns among some investors about Argentina's ability to fulfill its obligations to international creditors. However, she stated that at present, it is difficult to have strong doubts about whether Miller's economic reforms can continue to be effective.
In order to enhance the country's financial status, Millet has sought new loans from the International Monetary Fund. Some investors are also hoping that Miller's previous good relationship with Trump and Musk can help Argentina reach an agreement with the International Monetary Fund headquartered in Washington.
A spokesperson for the International Monetary Fund stated at this month's press conference that negotiations with Argentina are currently underway.