Bargain-hunters are beginning to circle Argentine assets after last week’s savage sell-off, but some investors say they would need prices to drop further before the risk of an Alberto Fernández presidency is fully factored in.
On the heels of a surprise primary election result that raised fears of a return to populism in Argentina, the country’s once-vaunted 100-year bond traded to a record low of 45.76 cents on the dollar. The fall came amid a market rout that razed stocks and bonds while knocking the value of the peso by more than 20 percent against the dollar.
The country’s dollar-denominated bond maturing in 2117 has since regained some ground, in line with most of the government’s debt, to just shy of 50 cents on the dollar. Even so, many emerging market bond investors are keeping their eyes trained for the bonds to sink to a range they say is in line with the expected recovery value in the event that Buenos Aires defaults on its debt.
“Argentina dollar bonds in the 40s are good value,” said Paul Greer, a London-based portfolio manager for Fidelity International. “The . . .
premium would be appropriate for the risk that you’re taking, and it starts to look interesting.”
Edwin Gutierrez, the head of EM sovereign debt at Aberdeen Asset Management, also sees “decent value” should the bonds remain in the 40s. But to step in, Mr. Gutierrez cautioned, he needs “forced sellers to get out” so “the guys interested in buying have enough of a discount to get back in”.
The spectre of default has grown in recent days, with the implied probability of Argentina missing a payment within five years rising to more than 90 percent, according to credit default swaps pricing. Moreover, Fitch Ratings warned of “increased signs of a probable default”, when it downgraded the country on Friday alongside fellow rating agency Standard & Poor.
“If dollar bonds do trend into the 40s, you are all but pricing in the recovery scenarios in line with what the market is expecting,” said Pramol Dhawan, the head of the EM portfolio management team at Pimco, the investment group. “If that is the case, the bonds become a distressed asset.”
Others have estimated recovery values as high as 50-60 cents on the dollar, but caution that there are too many unknowns to get a firm grasp of what is feasible.
“Forty is a historic recovery value and could offer some price support, but that doesn’t mean it’s the floor,” said Siobhan Morden at Amherst Pierpont Securities. “We have to understand the Argentina-specific situation before we can do any serious calculations.”
As such, the lack of clarity about the contours of an economic programme or cabinet appointees from Perónist Alberto Fernández — who is slated to be the next president after the election proper in October — gives Ms. Morden pause.
“His lack of sensitivity to financial stress is very worrisome,” she said. “It shows he doesn’t understand that it could reach a point where the situation is ungovernable for him in October.”
Analysts said much depended on what economic tack Mr Fernández would take and what relationship he would seek to maintain with the IMF — which extended the country a record $56bn bailout in 2018 that Mr. Fernández said must be renegotiated. But Ricardo Adrogué, the head of global sovereign debt at Barings, said the bigger risk stemmed from his running mate.
