By Tim Atwill
Argentina was once one of the largest Latin American equity markets. However, in the late 2000s a restrictive regime of capital and currency controls was instituted. This move, following numerous other self-inflicted wounds, was the last straw for MSCI, which downgraded Argentina’s status from emerging to frontier in 2009, effectively removing it from most emerging-market portfolios. Still, those who continued to hold exposure to Argentina benefited, with index returns of 66.0%, 19.0% and -0.50% for calendar years 2013, 2014 and 2015, respectively.
At the end of 2015, significant changes began occurring rapidly in Argentina. The longtime ruling party was unexpectedly voted out of office, and the new government moved swiftly to unwind its capital and currency controls, signaling a deep desire to reignite trade and allow foreign ownership of its stocks. Since then, investor reaction has been equally swift, with Argentina’s most recent bond issuance oversubscribed (with press reports that the $15bn issuance currently has investor demand to the tune of $70bn), and Argentine equity markets outpacing both emerging- and frontier-market indexes on a year-to-date basis.
With all this positive news came the speculation that MSCI was to consider changing Argentina from frontier back to emerging-market status. However, this graduation will most likely not take place until 2018, by which time, arguably, any outsized returns from Argentina’s economic liberalization measures will have already happened.
Given the observation that returns were not overly punishing for those who stuck with Argentina, it can be argued that a better choice for emerging-market investors may be to invest in a strategy that includes a relatively static allocation to a diversified set of frontier-market countries. Here’s why:
The motivation for investment in both markets is the same: seeking to capture the growth opportunities present in the less-developed economies of the world.
The size distinction between frontier and emerging is in many ways artificial with regard to this thesis, further reinforcing the argument to include an allocation to both classes in emerging-market portfolios.
The long process in moving a country from frontier to emerging allows much of the gains from this positive news to be realized prior to graduation, as was the case in 2014 for Qatar and UAE, and appears will be the case for Argentina.
Bottom line: Although there is a delay in reverting Argentina back to emerging-market status, this does not mean that investors should shy away from frontier-market countries. A static allocation to a diversified set of these may prove beneficial, given that the motivation for investment in both markets is similar and the process of changing country from frontier to emerging allows time for gains from the positive news surrounding the market.
Tim Atwill is head of investment strategy at Parametric – a subsidiary of Eaton Vance
