Argentina ETF In Focus On Nationalization Proposal - ETF News And Commentary
April 17 2012 - 5:51AM
Zacks
For investors who focus on emerging market ETFs, political
intervention should always be a key worry. While many governments
in emerging nations have done a pretty good job of letting
companies exist freely outside the state, Argentina has apparently
taken a different approach as of late.
In recent reports, Argentinean President Cristina Kirchner looks
to send a bill to Congress to nationalize the largest oil and gas
company in the country, YPF SA (YPF). The proposal
looks to declare the oil industry one of ‘national public interest’
and would take 51% of the company, dividing assets among the
federal and provincial governments.
The proposal marks the beginning of the end for the fight
between the Argentine government and the oil giant as some in
Argentinean politics blamed the company for a lack of oil
production. These charges are not without merit as hydrocarbon
consumption has surged over the past few years but oil and gas
production has slid in the country.
However, industry insiders point to high taxes, an uncertain
investment climate and price caps as the primary reasons for the
decline in production. Seemingly, these industry representatives
certainly have a point, especially given the nationalization
proposal which could stifle investment by other firms in similar
industries as well.
The bill also continues a sorry decade for investor rights in
the South American nation. The default on foreign debt in 2001 was
soon followed by price and capital controls, which were in turn
followed by private pension nationalization in 2008. Clearly,
investors should give pause before considering putting their
dollars to work in this nation, especially given the recent trend
in the marketplace.
Don’t Cry For The Argentina ETF
In order to play the Argentinean economy in basket form,
investors have the FTSE Argentina 20 ETF (ARGT)
from Global X. The fund hasn’t exactly caught on with investors, as
the ETF has less than $5 million in assets and sees pretty wide bid
ask spreads.
On the nationalization news, the Argentina ETF sank by 3.6%,
pushing the ETF pretty close to its 52 week low. While many
Argentinean stocks weren’t too heavily impacted by the news, it
should be noted that YPF does make up the fourth biggest allocation
in the South American ETF and this company plunged by 11% during
market hours although it was up about 2.4% after hours.
Beyond this, it is also troubling that the two biggest sectors
in ARGT are energy and basic materials. Given that Argentina has
proven to be a proponent of nationalization in the energy space and
that basic materials could suffer the same ‘national public
interest’ fate, it doesn’t look good for the fund going
forward.
In fact, these two sectors combine to make up nearly 45% of the
total assets including four of the top ten holdings. Additionally,
one has to wonder how much other energy companies will want to
invest in Argentina after this debacle, possibly signaling a shift
in policy by many oil firms that have operations in the nation.
“Going forward, you are going to see a severe retrenchment of
external investors in looking at Argentina,” said Enrique Alvarez,
head of Latin American research at IDEAglobal, in a Marketwatch
interview. When nationalism and expropriation “come back into the
government lexicon, those are terms that have no fit whatsoever in
the current, broader scheme of financial markets and of investments
around the globe.”
Thanks to this report and the general uncertainty in this South
American market, many investors may want to shy away from an
Argentina stock purchase. If anything, ARGT could be an intriguing
long term short candidate, or part of a pairs trade with other
South America ETFs.
Chile (ECH), Peru (EPU) or
Brazil (EWZ), could all be better picks for
investors intent on exposing their assets to South America without
the economic mess that is Argentina. After all, the move by
Argentina is being portrayed by many as a desperate move in order
to plug holes created by a decade of economic mismanagement and
misallocation. It seems highly unlikely that the nationalization
will solve the country’s problems—without creating a whole host of
new ones—and for that reason investors should stay far away from
ARGT for the foreseeable future.
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