On Monday we were treated to the announcement of Argentina’s July 0.5% monthly shiatsu inflation figure. As a Buenos Aires friend commented, “(The headline inflation rate) makes you laugh right up to the moment you walk in the supermarket.” Apparently, as a pair of men’s winter trousers could be snapped up at a 32% discount (Which pair of pants? Was that a month-on-month same store comparison? How many pairs of the same style and at the same store did they sell in June?), we can all rest easy. Not surprisingly, stocks and bonds sold off on the news, the Merval index dropping 1.8% and not taking its normal lead from the Dow Jones and its 289 point rise.
Later, comments to the press by highly influential cabinet chief Alberto Fernandez reminded us all that there is a presidential election up soon. From Bloomberg: Aug. 7 (Bloomberg) — Argentine Cabinet Chief Alberto Fernandez said declines in the country’s bonds track a global rout and aren’t because of inflation concerns.
“The U.S. housing bubble has popped,” Fernandez said during a conference in Buenos Aires. “This isn’t because of doubts regarding inflation. What is happening to us is happening to all on the continent.” Pass the Kool-Aid, Beto. The EMBI+ LatAm spread of 241 basis points is apparently the same as Argentina’s 473 basis points. In fact, LatAm fixed income risk peaked on the 26th July and has dropped ever since. Argentina’s spread also jumped on the 26th, but just kept on spreading.
So what to make of this? There are many theoretical, statistical and even philosophical conclusions that can rightly and usefully be drawn, but a more practical answer would be to buy Argentine sovereign bonds. Inflation is certainly a problem, but it’s no worse than in Venezuela. Politics are centre stage presently, but with U$43Bn in central bank reserves and Chávez willing to buy up Argentine paper wholesale (and judging by the chart above, increasing his own country risk!) there is an all-but-zero risk of a default under present circumstances. Not bad for a 10% yield. What is more, the Argentine Peso is a knock-down bargain at the moment, having sold off from its already pegged P$3.10 level to the dollar in recent days to stand at P$3.14. As we also expect the Peso to appreciate in the first part of a Cristina Kirchner government to around P$2.80 to the dollar, a medium-term investment in Argentine bonds (preferably local currency) is one of the more attractive risk/reward investments in Latin America right now.