Additional FX Downside Would Trigger Equity & Debt Sell-Offs
Argentine equities and fixed income have retraced following a massive rout triggered by the January 23 devaluation of the peso, but we caution that there is still considerable potential for further downside over the medium term. We do not believe the recent devaluation has addressed the core drivers of the country's external account imbalances, meaning there is reasonably high likelihood of another devaluation over the medium term ( see 'High Likelihood Of Another Devaluation', January 27). Such a development - while not yet our core view - would lead to another round of heavy selling of Argentine financial assets, and as a result we remain neutral on Argentine equities and fixed income.
The MSCI Argentina Index, which generally tracks movements on the country's Merval Equity Index, fell by 17.7% during the week ending January 24, but is up 7.0% year-on-year (y-o-y) and is trading well above its 2012 lows. Indeed, price action suggests that the index may be forming a base around the 1,500-1,550 level. We take this to mean that investors are still relatively more optimistic on Argentine equities than they were during much of 2012 and H113. The index remains 66.2% above its November 2012 low of 932.41, and we believe this illustrates just how much farther the index could fall in the event of another one-off adjustment to the exchange rate.
A similar trend can be seen in the American depositary receipt (ADR) for state-owned oil and gas company YPF, which had broken through support around US$23.00 in the wake of the devaluation, but then rallied to US$23.76 and is up 39.8% compared to a year ago. We see this as indication that investors have not yet soured on Argentine equities to the extent that they did following the company's nationalisation in April 2012. While this reflects a degree of optimism in the company's ability to weather the current macroeconomic troubles, and a belief by investors that partnerships with international oil companies will help it unlock massive unconventional oil and gas resources, we cannot rule out additional currency weakness that would send the dollar-value of the ADR much lower. Furthermore, considering the fact that YPF is up 152.3% since hitting a recent low of US$9.21 in November 2012, we believe another devaluation could see the ADR head much lower, especially with little technical support on offer.
|Another Devaluation Would See A Break Through Support|
|Argentina - MSCI Argentina Index (weekly)|