Argentina: Where Growth & Stock Market Returns Diverge (Mobius Blog)
Earlier in the summer, Mark Mobius wrote a blog post where he explained why growth matters for stock market performance (as growth should be reflected in corporate earnings), but he also cited Argentina as an example of when a stock market moves out of sync with economic data and growth trends. After all and despite all its economic and political problems, Argentina’s stock market was one of the best performers globally in 2014 and the Merval Index was up more than 30% at the end of the first half of 2015.
Nevertheless, GDP growth was barely positive last year and is expected to decline this year while inflation (as measured by consumer prices) is expected to increase more than 18%. The government’s fiscal accounts have also been deteriorating and the government has been pursuing interventionist policies like currency controls, capital controls and import and export controls.
Mobius then noted:
According to our team in the region, part of the reason is because wealthy individuals in Argentina who want to preserve their assets in the country are flocking to stocks, property and gold, viewed as among the most convenient and liquid investments.
Additionally, hope for change in Argentina has also likely been contributing to positive stock market performance. Many investors are putting their hopes on political change when the country’s general election takes place in October of this year.
And while Argentine stocks were cheap relative to peers in Latin America a few years ago, that’s generally not the case anymore due to recent market performance. After all, stock markets tend to be forward-thinking and this can lead to a mismatch with economic statistics which are backward-looking.
Mobius also added:
When I was investing in Argentina in the early 1990s, inflation was running at some 1,000%, and it was very difficult to make earnings projections for companies. I had to make investment decisions on different criteria; I’d look at the price-to-book ratio instead of price-to-earnings, for example. People said I was crazy—but sometimes you have to adjust your value orientation when there are distortions in an economy. Looking at the book value of companies enabled us to purchase company assets at what we viewed to be discounted prices, since the stock market was so depressed.
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