FT
Mark Mobius and the case against Argentina
3 hours ago By: Colby Smith
Veteran investor Mark Mobius made a name for himself by making big bets on unloved emerging economies around the world. He went bargain hunting across Asia as the
financial crisis rippled through the region in the late 1990s. He also snapped up Russian stocks around the same time, despite the country defaulting on its debts in 1998. And before most investors even considered investing in Africa, Mobius already had.
No stranger to volatility, Mobius once wrote that “the best time to buy is when everyone is screaming that there's blood in the streets”. But for the so-called “father of emerging markets”, investing in Argentina is just a step too far.
He sat down with Alphaville recently and told us that his firm Mobius Capital Partners, which he started last year after three decades at Franklin Templeton, is sitting on the sidelines for the time being when it comes to the stricken Latin American country:
The situation is quite dire. Quality of life has declined, education levels have gone down and we are not happy with the macroeconomic situation yet . . . There has been a lot of pain and people can only take so much.
The macroeconomic picture in Argentina is a dismal one. Last quarter, GDP fell 6.2 per cent year-over-year, the worst contraction since the global financial crisis. The unemployment rate sits at 10 per cent and inflation remains stubbornly above 50 per cent, despite interest rates being above 60 per cent.
Here's a chart from Alberto Ramos at Goldman Sachs showing just how much wages, in real terms, have been squeezed since the beginning of last year:
Adding to the people's angst is the ever-gyrating peso, which after losing half of its value against the dollar last year, shed an additional 12 per cent in the first quarter, even with the support of the largest IMF programme in the Fund's history.
Since early March, intraday exchange rate volatility has surged, per Ramos again, motivating Argentines to return to the now well-worn tradition of swapping pesos for dollars:
Ramos says the pain (at least in the short-term) is necessary given the major macroeconomic imbalances that have plagued the country for decades. For a long time, the chief concern has been Argentina's twin deficits — current and fiscal — which Ramos points out has typically been “financed by either inflationary money creation and/or unstable and unsustainable external borrowing”. Thanks to a recession and ultra-tight monetary policy, both of the deficits have narrowed quite dramatically, with the country even running a primary fiscal surplus. Still, investors and the IMF alike are demanding Argentina stick with this rebalancing.
Front and centre for Mobius is if this economic pain will eventually surface at the ballot box. Current president Mauricio Macri is up for re-election in October, and policy continuity, as well as the fate of the IMF's historic bailout package, rests on him, or his like-minded colleagues, winning the presidency again.
For Mobius, it's a big problem:
There are so many negatives that Macri has to overcome. He is under a lot of pressure, and he needs to get a strong political mandate in the election before we reconsider [investing].
As it stands, his scepticism is well-founded. According to Andrea Kiguel at Citi, trust in the government has plummeted since Macri took office a few years ago:
Recent polling also shows a tight race between Macri and former president, and fervent populist, Cristina Fernández de Kirchner (assuming she runs). If Macri instead faces off against a moderate member of her Peronist party, some reckon he will lose. With a current approval rating of 30 per cent, that reality isn't arguably too far-fetched.
With Argentina's economic future hinging on an electoral win for Macri in six months time, Mobius tells Alphaville he sees no reason to invest just yet. Instead, he'd rather wait until the political risk subsides. Because if Macri ends up pulling off a victory, Mobius says, the president will be “home-free”:
If he continues to follow the programme carefully and religiously, then the money will roll in. The IMF will continue to support him as well, but they have learnt their lesson. They will help in drips and drabs: 'If you do this, we'll give you $2bn. If you do that, we'll give you another $2bn.'
