Investors want in on Argentina's market, but can't find stocks

Adecoagro

01/07/2016 17:37

By Dion Rabouin 
    NEW YORK, July 1 (Reuters) - After long considering 
Argentina's equities, Manning & Napier Inc  MN.N  portfolio 
manager Ben Rozin was finally motivated to buy late last year, 
taking a stake in agriculture company Adecoagro SA  AGRO.N .     
    Rozin is one of several fund managers encouraged by last 
year's election of market-friendly President Mauricio Macri. But 
as Manning & Napier has sought to broaden its exposure to 
Argentina, a one-time market pariah, it has been hindered by a 
lack of publicly-traded Argentine companies.  
    Argentina's recent deal with "hold-out" hedge funds - who 
for years battled former President Cristina Fernandez de 
Kirchner - has thrown the doors open to buyers of the South 
American country's debt. Investors scooped up $16.5 billion of 
its multi-tranche sovereign bonds, and another $4 billion from 
its provinces and assorted corporations. 
    Another U.S. dollar bond sale was announced on Thursday. 
 urn:newsml:reuters.com:*:nL1N19M0R6 
    But equities remain problematic. 
    "The biggest issue is that there aren't a lot of companies 
listed," said Rozin, one of several investors who had interest 
in buying stocks after Macri's election, but have struggled to 
do so.  
    Argentina's benchmark Merval index  .MERV , which has 
rallied 29 percent this year after a 36-percent rise last year, 
comprises only 15 stocks. The overwhelming majority are 
regulated utilities like Pampa Energia  PAM.BA  or 
commodity-dependent, like oil company YPF  YPFD.BA .     
    "The banks and the utilities present a large amount of the 
market cap, but for us, due to the regulatory issues and also 
the inflationary issues that a lot of the banks are dealing 
with, we just have not had a positive outlook on either the 
banks or the utilities." 
     
    HURDLES TO INVESTMENT 
    Portfolio managers say the country's capital controls and 
restrictions had long kept them from investing in Argentine 
stocks or adding to existing positions.  
    Macri's reforms have included removing capital controls, 
relaxing reserve and deposit requirements and cutting the 
country's holding period on foreign investment - though he has 
not removed it entirely.  
    But he has yet to tackle some of the biggest impediments to 
investment: the government's requirement that investors 
physically be in Argentina to purchase stocks and that they buy 
stocks in pesos, which remain difficult to exchange for dollars. 
    Those have often sent investors in search of other more 
accessible assets, said Belkis Rodriguez, Vice President of 
Equity Trading in Latin America at market maker INTL FCStone 
Financial Inc  INTL.O .  
    "Because of all the hurdles of settling a trade locally, 
it's very expensive," Rodriguez said. "And few brokers know the 
process or even want to deal with that." 
    Investing in countries like Brazil, Chile and Colombia 
requires that investors have local registration or work with 
broker-dealers in the country, Rodriguez added, but it is a 
dramatically simpler process than in Argentina. 
    "There's so many things that the government has to do," she 
said. "We'd like to see progress made on the equities side, but 
I don't know how long that's going to take." 
    The government is aware of the issues foreign buyers face, 
said a source within Argentina's stock market regulator with 
direct knowledge of efforts to increase investment. But it is 
more focused on a proposed tax amnesty for residents with 
undeclared funds. 
    "For now (the stock ownership issue) is being studied but 
there is nothing certain," said the source, who asked not to be 
named due to the sensitivity of the matter. 
    As a result of the roadblocks, those interested in buying 
Argentine equities have typically had to buy ADRs, which are 
essentially surrogate stocks issued by a U.S. bank and traded on 
a U.S. exchange.  
    "I wish we had more opportunities, more choices to invest in 
Argentina," said Luiz Ribeiro, senior equities portfolio manager 
for Deutsche Bank's Latin America Equity Fund, which owns 
American depositary receipts (ADRs) in Supervielle  SUPV.N  
 SUPV.BA . The financial group raised around 3 billion pesos 
($201 million) in May in the country's first initial public 
offering since 2010.  urn:newsml:reuters.com:*:nL2N18G026 
    Argentina's stock markets are so opaque that even the Global 
X MSCI Argentina ETF  ARGT.K , which has seen $43 million in 
inflows this year, roughly doubling its size, does not invest in 
actual Argentine stocks. It is made up mostly of ADRs, with 
other stocks that have exposure to Argentina or have operations 
there.  
    "If capital controls remain lifted for a while and foreign 
investors become more comfortable investing in the local 
securities, what you could see is the need to invest in ADRs 
becomes lower," said Jay Jacobs, director of research at Global 
X, which operates the fund.  
     
    AN EMERGING MARKET 
    The Argentina ETF is based on a benchmark set by index 
compiler MSCI, which has said it will consider reclassifying 
Argentina to an emerging market next year.  
    MSCI downgraded Argentina to a frontier market in 2009 
because of the government's restrictions on capital flows and 
other regulations.     
    "We've identified a lot of the improvements that have been 
made around capital flow restrictions and around FX market 
liberalization," said Craig Feldman, executive director index 
management research at MSCI, adding that the test would be 
whether the changes were "being experienced on the ground." 
    Emilio Ilac, chief executive of local investment bank 
Puente, who managed the recent IPO of sweets-maker Havanna 
 HAVH.BA , has worked with dozens of companies that have 
recently filed IPOs in Argentina's local market. He's confident 
the equity market is going to strengthen and offer investors 
more choices soon. 
    There is still much to be done, Deutsche's Ribeiro said, but 
he has faith because, "the first adjustments were made in a 
record time. 
    "I think the market is just starting to open up," he added.  
 
 (Additional reporting by Walter Bianchi; Editing by Christian 
Plumb) 
 ((Dion.Rabouin@thomsonreuters.com; +1 646 223 5946; Reuters 
Messaging: dion.rabouin.reuters.com@reuters.net)) 
 
Keywords: ARGENTINA EMERGING/STOCKS