“Although the political environment is not very good, the companies are very cheap so we’re looking closely,” Mobius told Bloomberg, then went on to explain the valuation theme by referring to the MERVAL’s 6.9 times average price to earnings.
While valuations may seem attractive in the $368.7 billion South American economy, the sizeable political risks strike me as too high for the individual investor.
A recent article detailed the problems of the Kirchner administration with hyperinflation and increasing capital flight. The president nationalized the pension system in 2008 and decreed several controls on investment and corporate profits late last year.
Although shares may rebound strongly if political risks do not play out, there is the possibility of total loss in the event of nationalization.
Historically the energy and financial sectors are more likely to be nationalized or to face increased controls. Banco Macro (NYSE:BMA) provides banking products and services to individual and corporate clients in Argentina.
Despite surging 18.4% in the last five days, BMA still trades for 4.9 times trailing earnings. The stock pays a dividend yield of 8.8% but is down 56.2% from its 52-week high of $51.59 per share.
The Central Bank, in cooperation with the President, held a meeting with banking executives in December to pressure the country’s banks to lower interest rates. While valuation may seem attractive and the shares may bounce further from their lows, continued pressure to lower rates will squeeze profitability.
YPF SA (NYSE:YPF) is engaged in the exploration, development and production of oil and natural gas in the country. The company is the largest in a country where sizeable shale oil and gas reserves have recently been found, but government intervention in the sector may continue to hold back growth.
Price caps are common in the country and the president decreed last year that all oil & gas companies must repatriate foreign profits.
YPF has fallen 33.6% in the last year but recently rose 9.6% since December 19. The stock is not as cheap relative to other Argentine depository receipts at 9.4 times trailing earnings.
While investors should generally be discouraged from chasing returns in extremely high-risk investments, the Global X FTSE Argentina Fund (NYSEARCA:ARGT) may provide diversified exposure to the country and lower valuations.
The fund is composed of shares of the 20 most liquid companies based in Argentina or with significant revenues from the country.
The Bloomberg story concludes with Mobius talking up the LatAm consumer play and its “incredible potential to grow.”
Emerging Money provides insightful and timely information about the increasingly important world of Emerging Market investments. CNBC Emerging Markets Contributor Tim Seymour leads the team of Emerging Money to bring you cutting edge global news and analysis.