How to play Argentina

THERE is a type of footballer who inspires the affection of fans and the ire of coaches. He is talented, usually extravagantly so. But he is also wayward to the same lavish degree. Discipline seems beyond him, on or off the pitch. It was said of one of this kind, Stan Bowles of Queens Park Rangers and England, that if he could pass a betting shop as well as he passed a ball he’d be a rich man.

Which brings us, naturally, to Argentina—not to its footballers, who have mostly fulfilled their potential, but to its economy, which has not. A century ago, it was the country of the future. It betrayed that promise without ever quite extinguishing hopes that it might eventually live up to it. Like a talented but troublesome sportsman, it keeps being given another chance. The board of the IMF will soon approve a $50bn support package for Argentina. It has had countless such programmes in the past without much changing. The fund is betting that this time is different. Should investors make a similar wager?

Judicious bets on serial underperformers can pay off handsomely. Reforms have led to bountiful investment returns in surprising places, such as Turkey and Brazil in the early 2000s or Pakistan and Ukraine after 2013-14. None of these places became an earthly paradise. But moving from an unruly economic policy to something more disciplined is a big turnaround. Many attempts fail. A prudent course in such cases is to buy hard-currency or short-dated bonds at first. Only later should riskier assets, such as equities, be considered.

Turnarounds follow a pattern. They start with a devaluation. The flow of foreign capital dries up. There is a costly effort to prop up the currency. It dawns that stiffer measures are needed to restore confidence. The IMF is called in. That, more or less, describes Argentina’s recent travails. But there is a crucial difference, says Graham Stock of BlueBay Asset Management. Argentina was already on the right course. Mauricio Macri was elected president in 2015 to fix the economy, but his efforts ran aground. Rising interest rates in America prompted investors to take a charier view of emerging markets. Argentina’s central bank had eased its inflation targets and cut rates; skittish investors saw a lack of resolve. The peso fell by a fifth in two weeks.

Pass or shoot?

Things could now go one of two ways. With luck, by October 2019, when elections are due, inflation will be falling and the economy will be picking up. In the meantime, real interest rates are likely to stay high, offering investors in short-dated bonds a handsome return. But with such rewards come risk. The medicine might not take. Reforms may be derailed by hardship and unrest. It helps that Argentina has negotiated a fairly modest tightening in fiscal policy. The IMF has learned that if it wants the patient to recover, it must not kill it first, says Claudia Calich of M&G, a fund-management group.

A harder task will be managing the peso. Inflation in Argentina is 26% and set to rise further. That means the peso will need to drift down to keep the real exchange rate steady and exports competitive. Yet it must not fall too quickly. That might spur locals, who recall a brutal devaluation in 2001, to rush into dollars. A run on the peso and on Argentina’s banks would be fatal. A fresh sell-off in other emerging-market currencies would put pressure on the peso. A particular worry is Brazil, Argentina’s biggest trading partner, which faces a rocky period ahead of its own elections in October.

Still, the IMF’s package is enough to fund Argentina until 2020. And if the emergency repairs go well, the country can look forward with optimism. Should real incomes begin to rise and the middle class to swell, the value of stocks might multiply. The MSCI dollar index of Argentine stocks surged last year on such hopes. Much of that gain has been lost. Bank stocks are a way investors might choose to regain equity exposure. “Nothing good happens without access to credit,” says Andrew Brudenell of Ashmore, a fund manager. Businesses will need working capital and loans. Consumer economies thrive on credit. And Argentina is underserved in this regard. Bank credit to the private sector amounts to just 16% of GDP.

Progress never follows a straight line. Reformed characters, such as Turkey, have since fallen from grace. Complacency sets in. It is much the same with wayward footballers. The pragmatic coach does not bank on changing a maverick. He instead hopes to keep him on track long enough to benefit the team. It is an approach that investors might also consider.