Argentina: Strong growth to continue
Argentina, which has made major structural reforms since the 1995 Mexican devaluation, is experiencing dramatically improved fundamentals, annual GDP growth of 8% and a corresponding bull market.
Dario Lizzano, head of research at Santander Investment in Buenos Aires, predicts 10-12% market growth in the next six months. Strong GDP growth coupled with improvements in tax collection will continue this improvement," he says. He highlights a strong imbalance between supply and demand with pension and mutual funds' equity investments increasing by $150m-200m each month.
Market growth is set to slow but Victor Galliano of BBV Latinvest in London says his calculations show growth in the high teens for 1998 when oil conglomerate YPF, which has experienced strong growth and makes up 25% of the index, is stripped out.
Veronica Berger Collins, fund manager on the Latin American desk at Foreign & Colonial in London, says Argentina's "huge economic expansion" is underpinned by the dollar peg. "When you have convertibility you have no monetary tools to smooth out the growth."
Berger Collins explains that the peso devaluation allowed an acceleration of the reform process. Only a controversial labour reform remains and she expects it to be approved following the imminent mid-term Congressional elections. In Brazil, by contrast, structural reforms are still at the debate stage.
Jose Aguinaga, managing director of fixed interest at Latinvest, is optimistic for bond markets in the medium term because of an expected re-rating. "In the short term what worries the market is the excess of bonds, mostly sovereign paper due to the huge current account deficit, and the need to refinance quite a lot of debt. Things will be a bit heavy this year and next."
However, the improving fundamentals and the re-rating should make up for this by encouraging more buyers.
Looking at the markets, Berger Collins sees the prospect of re-rating on both macro and micro levels. The GDP growth, a recent $1bn debt repayment plus refinancing for 1998 expected to begin before year-end should lead to a market re-rating, while the robust position of the top companies should see them re-rated individually.
Lizzano says that industrial production generally will grown by 6.7%, but that the sectors he favours - construction, steel and retail - will see even better performance in 1997 and 1998
He says: "Steel consumption per capita is still very low with clear upside potential. Cement output has increased by 30% compared to 1996 and there is still a lack of infrastructure." In steel his top pick is Asinda, in cement Minetti and Corcemar and in retail Disco.
Galliano favours telecoms, both Telecom and Telefonic, although the latter is slightly more vulnerable with its corporate and cellular client base. He would overweight Cidera and Minetti in cement and believes brewer Quilmes, out of favour since Budweiser's market entrance, is very undervalued.
On the oil sector he is cautious about YPF, but recommends both it and Astra.
Assessing the risks, Berger Collins says: "The only risks are external. There may be some volatility from mid-term elections but there is almost total political consensus about the economy."
These external risks include a Brazilian devaluation, a rise in US rates - also noted by Galliano - a repatriation of investments from the Japanese and perhaps a sharp fall in grain prices. Lizzano sees some risk of an increased trade deficit and Santander has revised its deficit prediction from $2.3bn to $3.6bn or 2.9% of GDP."