The Big Idea
Argentina | Diversification from market beta
This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors.
Few if any resilient credits have made it through the latest round of risk aversion in emerging markets. It has been a one-two punch of equity and Treasury weakness across both high yield and investment grade credits. Argentina has been the stealth outperformer so far this year mostly due to the positive total returns of the quasi-sovereign and corporate credits. The off-benchmark credits have provided diversification with a lower correlation to external risk. The favorable technical in these credits also offer a clear benefit amid scarce opportunities elsewhere in emerging markets.
The quasi-sovereigns enjoy a long list of supportive technicals and defensive characteristics. Most importantly, it’s the attractive valuations and low volatility that offer a combination of low beta and high carry returns. The favorable positioning risks also discourages sellers at a mature phase of divestment that leaves core buy-and-hold investors with a longer-term investment strategy. The “unloved” status may not invite new buyers into Argentina but it’s also a mature phase of divestment with the remaining investors adopting a longer-term view. This discourages opportunistic or activist trading that lowers the volatility and correlation to market risk. This then allows investors to benefit from high carry returns, with the majority of the quasi-sovereigns and corporates offering extra spread premium for the “guilty by association” to the sovereign. The sovereign remains at distressed bond prices near 30 but under a slow transition towards effective policy management with the anchor of a flexible IMF program and the marginalization of radical Kirchnerismo. The high-yield status also immunizes against the US Treasury weakness that has been the primary constraint for the investment grade credits.
Ranking the year-to-date performance of the Argentina EMUSTRUU index, the off-benchmark credits are the notable outperformers. Amherst Pierpont this year has preferred the relative value of quasi-sovereigns with alternatives ranging across credit quality, liquidity, and yields. YPF stands out as the clear outperformer as the obvious expression of the positive oil shock, but all of the quasi-sovereigns have delivered positive total returns. Despite the “benchmark size” liquidity of BUENOS’37A at $6.2 billion, this bond was still able to eke out positive year-to-date returns of 0.95%. This compares favorably against EMUSTRUU index year-to-date losses of -12.9%. This reflects the combination of the tight trading range for bond prices at 40-44 and the high current yield of 9%-10%. There has been firm support at price lows of 40 with the IMF offering a de facto anchor while the higher relative coupons at 3.9% versus 1%-2% for the sovereign.
1 (212) 692-2539
This material is intended only for institutional investors and does not carry all of the independence and disclosure standards of retail debt research reports. In the preparation of this material, the author may have consulted or otherwise discussed the matters referenced herein with one or more of SCM’s trading desks, any of which may have accumulated or otherwise taken a position, long or short, in any of the financial instruments discussed in or related to this material. Further, SCM may act as a market maker or principal dealer and may have proprietary interests that differ or conflict with the recipient hereof, in connection with any financial instrument discussed in or related to this material.
This message, including any attachments or links contained herein, is subject to important disclaimers, conditions, and disclosures regarding Electronic Communications, which you can find at https://portfolio-strategy.apsec.com/sancap-disclaimers-and-disclosures.
Copyright © 2023 Santander US Capital Markets LLC and its affiliates (“SCM”). All rights reserved. SCM is a member of FINRA and SIPC. This material is intended for limited distribution to institutions only and is not publicly available. Any unauthorized use or disclosure is prohibited.
In making this material available, SCM (i) is not providing any advice to the recipient, including, without limitation, any advice as to investment, legal, accounting, tax and financial matters, (ii) is not acting as an advisor or fiduciary in respect of the recipient, (iii) is not making any predictions or projections and (iv) intends that any recipient to which SCM has provided this material is an “institutional investor” (as defined under applicable law and regulation, including FINRA Rule 4512 and that this material will not be disseminated, in whole or part, to any third party by the recipient.
The author of this material is an economist, desk strategist or trader. In the preparation of this material, the author may have consulted or otherwise discussed the matters referenced herein with one or more of SCM’s trading desks, any of which may have accumulated or otherwise taken a position, long or short, in any of the financial instruments discussed in or related to this material. Further, SCM or any of its affiliates may act as a market maker or principal dealer and may have proprietary interests that differ or conflict with the recipient hereof, in connection with any financial instrument discussed in or related to this material.
This material (i) has been prepared for information purposes only and does not constitute a solicitation or an offer to buy or sell any securities, related investments or other financial instruments, (ii) is neither research, a “research report” as commonly understood under the securities laws and regulations promulgated thereunder nor the product of a research department, (iii) or parts thereof may have been obtained from various sources, the reliability of which has not been verified and cannot be guaranteed by SCM, (iv) should not be reproduced or disclosed to any other person, without SCM’s prior consent and (v) is not intended for distribution in any jurisdiction in which its distribution would be prohibited.
In connection with this material, SCM (i) makes no representation or warranties as to the appropriateness or reliance for use in any transaction or as to the permissibility or legality of any financial instrument in any jurisdiction, (ii) believes the information in this material to be reliable, has not independently verified such information and makes no representation, express or implied, with regard to the accuracy or completeness of such information, (iii) accepts no responsibility or liability as to any reliance placed, or investment decision made, on the basis of such information by the recipient and (iv) does not undertake, and disclaims any duty to undertake, to update or to revise the information contained in this material.
Unless otherwise stated, the views, opinions, forecasts, valuations, or estimates contained in this material are those solely of the author, as of the date of publication of this material, and are subject to change without notice. The recipient of this material should make an independent evaluation of this information and make such other investigations as the recipient considers necessary (including obtaining independent financial advice), before transacting in any financial market or instrument discussed in or related to this material.