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 - Snapshot Report). 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 - ETF report) 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 - ETF report), Peru (EPU - ETF report) or Brazil (EWZ - ETF report), 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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