Opportunistic investors are looking closely at Argentina following the primary election results last Sunday in which President Mauricio Macri lost by a far greater margin than expected casting serious doubts over the incumbent’s re-election chances in October. This triggered a drop in the peso which closed 15% weaker at 53.5 pesos per U.S. dollar and a 30% plunge in the stock market.
Investors had become bullish on Argentina following the election of President Macri in 2015 and, since then, the country has attracted record capital inflows, including the issuance of 100-year bonds that was oversubscribed on June 19th, 2017. That same year, the MERVAL Index gained c. 77%, agricultural production soared and Argentina positioned itself as one of the world’s most promising frontier markets. Today, the new centenary bonds trade for roughly 50 cents on the dollar and some investors are wary that they could be a preview of the problems to come in the world’s sovereign bond markets.
Only two years ago, however, in 2017, Argentina was in the midst of a revival of property investor interest thanks to a series of market-friendly reforms which, amongst others, sent hotel demand to its highest level in the last decade. In fact, in early 2018, JLL brokered the sale of two hotels in Argentina to investment funds managed by PointState Argentum for close to $100 million, including the Sheraton Buenos Aires Hotel & Convention Center and Park Tower.
Also in 2018, Equity International, Goldman Sachs and Centaurus Capital announced the single largest real estate investment deal in Argentina in over a decade deploying c. $300 million to form ARG Realty Group, a commercial real estate company based in Buenos Aires. The transaction included the acquisition of Pegasus Real Estate Fund’s one million square foot class A office and retail real estate portfolio.
Last year, though, has been tumultuous for the economy, as the nation faced one of its worst droughts in decades, a $57 billion IMF bailout as well as a collapse of its currency and equity markets. These events may have also created a historic opportunity to buy cheaply into the Argentinian economy which could potentially continue slashing spending and reforming the economy as promised by the current ruling party.
Investor consensus, however, is that it is likely for the government to change in Q4 of 2019. In fact, according to Isabelle Mateos y Lago, the chief multi-asset strategist at BlackRock Investment Institute, «the determination of the Argentine government to do the right thing is not in doubt, but its ability to do it for long enough is».
Contrarian investors argue that the market has historically overreacted to shifts towards Peronism but forgotten its numerous orthodox twists, such as one by Peron himself in 1952, by Peron’s wife in 1975 as well as by the Menem presidency during the ’90s. The new cabinet which is expected to hold office in December includes economists such as Guillermo Nielsen, Emanuel Alvarez Agis and Matías Kulfas who have made statements about their willingness to pay the external debt and sustaining fiscal and commercial surpluses. They also promote a dovish monetary policy in contrast with Macri’s administration.
If the resulting government’s economic management of the country is sound, its property sector can continue to attract international investment. In fact, the investment thesis remains unchanged as limited investment in Argentine commercial real estate over the past 15 years has resulted in significant under-supply as stated by Tom Heneghan, Chief Executive Officer of Equity International.