Is it Time to Buy Argentina?

At $640 billion, Argentina is among the largest economies in Latin America. The country boasts extensive mineral resources and is a major agricultural exporter, but its economy has been held back by high inflation, economic instability and a less-than-ideal business environment.

Argentina’s controversial new president, Javier Milei, has embarked on a drastic program of free-market reforms in an attempt to boost growth. Though certainly divisive, Milei’s programs have at least the potential to spur investment while unleashing the country’s domestic market.

With policies changing rapidly in Argentina, some risk-tolerant investors may be looking at buying an Argentine index fund like the MSCI Argentina ETF (ARGT).

Before doing that, though, it’s important to understand the backdrop against which the country’s challenges have occurred and how Milei’s new economic reform program is intended to help.

Is it time to buy ARGT or an equivalent index fund, or does Argentina still have to prove itself to investors before its stock market becomes attractive?

Milei’s Policies and Their Precedents in Latin America

To understand the direction Argentina is heading, it’s important to first look at the policies Milei is pursuing.

A libertarian professor of economics, the core of Milei’s political and economic thought involves the reduction of government in favor of private markets.

To this end, his political promises include the elimination of several key government ministries, low taxes, reduced costs for private employers, the elimination of popular subsidies and the privatization of state-owned companies.

Some of the cuts made so far have been drastic and swift, introducing fears of an economic shock. For example, almost immediately upon taking office, Milei laid off about 5,000 government workers.

This is expected to be the first round of cuts, with many tens of thousands more to lose jobs in government ministries over the coming year.

Milei’s dramatic free-market reforms have been compared to those implemented in Chile in the late 1970s by military dictator Augusto Pinochet.

Though roundly condemned for his abysmal human rights record, Pinochet reorganized the Chilean economy under the ideas of the Chicago school of economics. This approach differed drastically from many other Latin American countries that embraced higher degrees of government intervention in their economies at the time.

After a period of deep political and economic unrest under Pinochet’s regime, these reforms ultimately set the stage for multiple decades of stable economic growth as the Chile returned to a democratic government.

The country still operates under the constitution ushered in by the late dictator in 1980, and many of the market-oriented reforms have stuck despite recent calls for more government spending.

Today, Chile is the second-wealthiest country in South America by GDP per capita, eclipsed only by tiny Guyana and significantly outpaces the likes of Brazil and Peru.

Modest Signs of Early Success

On the bullish side for Argentina, Javier Milei’s economic policies appear to be bearing some early fruit.

Month-over-month inflation has fallen into single-digit territory for the first time since last October, and the country has gone from running a steep fiscal deficit to having an almost unheard-of budget surplus.

The sharp reduction in inflation over the past several months has also enabled Argentina’s central bank to make drastic cuts to its eye-watering baseline interest rates.

During Milei’s term, Argentina has cut its interest rates six times. Though the baseline rate still remains at 40%, this is down significantly from the levels that were required a year ago to keep some kind of a lid on hyperinflation.

Beyond the more pro-business policies of the Milei administration, it’s also important to remember that Argentina has a dynamic business sector that has thrived in spite of the structural challenges of the domestic economy.

The chief example here is MercadoLibre, an eCommerce company that has emerged as Latin America’s answer to Amazon. This company has become immensely valuable over the past several years and currently makes up about 22.7% of ARGT’s holdings.

Challenging Times Could Still Be Ahead

Although Milei’s policies seem to have brought Argentina’s runaway inflation under some degree of control, they have also caused the country to slip into a recession.

Argentina’s economy contracted in both of the last two quarters, declining more than 5% from a year earlier as of Q1. This recession is mostly attributable to the sudden contraction of government spending.

Milei’s reduction of government subsidies has raised the costs of many basic services for everyday Argentinians, though even this isn’t inherently a negative in the long run.

Argentina’s subsidy regime prior to Milei dated back to a financial crisis the country faced in 2001 and encompassed everything from energy to bus tickets.

Though previous administrations had attempted to pare back the subsidy programs, public backlash usually prevented any significant progress. As such, prices for many basic services remained frozen at their early 2000s levels, with the government footing the bill for the difference as input costs rose over the decades.

Despite the likely necessity of reducing these subsidies, there is little doubt that doing so has strained family budgets in the country and driven down consumption.

Price distortions built up over more than 20 years are unlikely to resolve themselves overnight, and Argentina could be in for a deeply disruptive period of adjustment as it weans itself off of unsustainable subsidies and adjusts to market-oriented pricing.

Furthermore, the economic distress felt by average Argentinians is once again resulting in a backlash that could stall the reform program out.

A prime example of this is the attempt to privatize a number of state companies, a key campaign promise for MIlei. This measure failed as part of an omnibus bill proposed to the Argentine Congress earlier this year. Protests against this and similar proposals have even brought about labor union protests.

Is ARGT ETF a Good Investment?

The ARGT ETF is a good investment for risk-seeking investors willing to bet that President Javier Milei’s policies will lead to an economic boom.

A relatively good model for Argentina’s near-term future could be the British economy in the early 1980s. During her first term as prime minister, Margaret Thatcher introduced sharp austerity measures akin to Milei’s as a means of combating similarly stubborn and high inflation.

The short-term result, as in Argentina, was the onset of a recession and a spike in unemployment. Later in the decade, however, the freshly unleashed and increasingly privatized British economy delivered multiple years of booming economic growth.

Overall, Argentina’s economy appears to be in a transitional period that, in the long run, could balance its budgets, result in a sustainable inflation rate and generate private sector growth.

Less than a year into the new administration, however, it’s likely too early for conservative investors to buy an ETF like ARGT.

In the long term, there could be significant opportunities in Argentina. On a nearer-term basis, it is best suited to investors with a higher risk profile.

An alternative approach may be to buy specific Argentine stocks that have a proven record of succeeding in spite of the country’s economic and political volatility. For example, MercadoLibre could be a good candidate here.

With a consensus rating of buy and a projected upside of nearly 19 percent, MercadoLibre has the potential to be an attractive buy in spite of a fairly high valuation.

At over one-fifth of the total portfolio, investors who buy ARGT will be disproportionately exposed to the company in any event.

If Argentina’s economy improves, the company will almost certainly benefit as a result. If it continues to struggle, MercadoLibre’s presence in other Latin American markets could protect the company and its stock prices.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.