Argentina has been a long-held
thesis in the portfolio, it is approaching its 3rd anniversary, with
the initial thesis being that the 2015 elections would bring significant change. The crucial fact was that President Cristina Fernandez de Krichner couldn’t run in the election,
after being term-limited and failing to secure the necessary votes for a
constitutional amendment. Under
Cristina, Argentina had largely been isolated from the world markets with
capital controls and a pegged currency that traded at a significantly different level in the black market (the ‘blue rate’). The country was also involved in a long-running argument with bond hold-outs that ended with
Argentina losing in court and being shut out of the global debt markets. The result was an economy with significant
imbalances (government subsidies/interventions), a large government deficit,
runaway inflation, and exceptionally high interest rates. However, this also meant
that Argentina was a country with very limited government debt - a benefit of
not being able to borrow internationally!
The opportunity was that all 3
candidates, including the one favored by President Kirchner, were all likely to
be substantial improvements. As luck
would have it, President Macri, the eventual winner, was viewed as the most market-friendly
candidate (and no ally of President Kirchner). Any doubts were dispelled in
the first 100 days with an array of actions including floating the currency, removing
capital controls, granting independence to the central bank (with a mandate to
reduce inflation), announcing substantial reforms/ cuts to subsidies, settling
with the old bond holdouts, and subsequently raising debt in the international
capital markets.
Unsurprisingly, markets
rejoiced…including Our Man’s Argentinean basket of stocks, which are up 140%+. OM expressed the Argentina
theme through a small basket (5-6) of stocks as the ETF (ARGT) was a poor
reflection of the opportunity (commodity heavy + largest position is focused
outside Argentina). The basket has steadily been pared back to OM's 2 favorite names, Pampa Energie (a beneficiary of
electricity subsidies being cut) and Adecoagro (an agricultural company).
The recent strong win by President Macri’s party in congressional elections only increases the chances of reforms,
and the possibility that Macri will run again.
With a low-level of government debt and wide-open credit markets,
Argentina will continue to have the opportunity to reform at a reasonable pace. Add to that a newly independent central bank
that has been willing to raise rates to conquer inflation. There are positive
signs as inflation has started to fall and this is widely projected to continue.
To Our Man this rather rhymes of a certain
1980’s US President who reformed an economy and saw the Federal Reserve defeat
inflation. That started a multi-decade
boom for numerous asset classes in the US. So don't expect Our Man to exit Argentina
any time soon (even if he can’t invest in Argentinean PE, which is likely the
best asset class)!!
Greece 2.7%
(International Book)
Our Man’s previous Greece exposure was exceptionally
disappointing – too early and over-sized – but like a moth to a flame, he has
returned. Yes, OM can see you shaking
your heads sadly – so, why now?
The French.
Yup, I kid you not.
The Frogs have gone and done it!
It being, breaking the impasse between the Eurogroup (*cough* Germans)
and the IMF over a longer-term plan on Greek debt sustainability - “The Eurogroup formally agreed to a longer-term French plan to link the scale of Greek bond repayments to the country’s economic growth…”
So, now we’re finally near the end of the tunnel and by
golly there’s light! The light is Greece
exiting the bailouts in mid-2018, with the banks looking like they are in
decent shape to pass the final stress tests,
and the market being prepared for new Greek debt. And the tunnel? After a 45% fall in GDP – the same decline as
the US saw during the Great Depression - finally some stability and growth
and a small government surplus. And so, OM is back and hoping that the clearer catalysts (stress tests, exiting the
bailout, issuing debt in the market and perhaps even elections) will stop the portfolio from seeing a second Greek tragedy.
India 3.3%
(International Book)
Our Man has a small position in India. Though the % of NAV is larger than Greece, it
is a much safer investment. It has neither the substantial risk nor the same massive potential
short-medium term upside as the Greek position.
The long-term bull case for India is very widely known,
and OM doesn’t have any special insight bar noting that the speed and prolonged nature of
these changes is often under-appreciated.
The long-term bull case starts with the 2nd largest country in
the world, which also (unlike the largest) has great demographics (working age
population is not expected to peak for at least the next 10yrs).
This is supplemented by some self-help. The Modhi government has been busy (not
always in a good way) and has made some structural shifts (taxation changes, bankruptcy code reform, financial
reforms, etc) that will have
long-term benefits. However, the most
interesting to OM is the push to digitize the economy, highlighted by the
introduction of Aadhar (a unique individual ID number based on biometric
information). Unfortunately, most of the
potential applications (loans, credit history, transaction confirmations, to
name the obvious ones….) of this are “in the future” and many will initially be
captured in the private markets (and OM is not a VC). Thus, until OM has a clearer idea of how to
directly benefit, expect India to be a small but consistent part of the
portfolio.
Disclaimer: Nothing above represents a recommendation in any way, shape or form so please don’t even think of trying to take the above that way. For added clarity, while Our Man is invested in all of the securities mentioned that’s a terrible reason for anyone else to do so. Our Man also holds some cash and a few other securities (of negligible value). You should not buy any of these securities because Our Man has mentioned them, but should do your own work and decide what’s best for you given your own circumstances/risk tolerance/etc.
