Fresh leaders may revitalise Argentina

This article is part of
Frontier markets - May 2015

From Georgia to Romania, Pakistan to Myanmar, Nigeria to Zimbabwe and across the Atlantic Ocean to Argentina, all of these countries are in the early stages of political or economic reforms.

This gives investors the opportunities to benefit from the strong economic growth that tends to follow these early-stage reforms.

With this in mind, there are two questions investors should ask themselves: Are you satisfied the country is now set on a long-term growth path? Are the changing policies having a real and sustainable effect on the country and its economy?

Investors should not be concerned with absolute levels of GDPs, income, output or other hard-to-measure factors such as corruption or functioning institutions. Instead, they should focus on the direction of travel. Populations tend to buy into economic and political policies when they feel better off and more secure, regardless of the starting point.

A country that encapsulates the highs and lows of emerging and frontier market investing is Argentina. The country can be classified as the very first emerging market when the Foreign & Colonial Investment Trust was set up in 1868 to invest in the Argentinian railroads. Since then it has fluctuated between being classified as a developed, emerging and, ultimately, now a frontier market. By 1908, Argentina was ranked as the seventh wealthiest developed nation in the world with a GDP per capita 180 per cent higher than that of Japan.

After 1930, Argentina descended into political instability and suffered periodic economic crises that pushed it back into underdevelopment, though it nevertheless remained among the 15 richest countries until the mid-20th century. Since then the country has been through boom and bust cycles, including military dictatorships and debt defaults, along with periods of strong growth.

The country is now on the cusp of more political change as the chief architect of its recent troubles, president Cristina Kirchner, will be replaced in the upcoming October presidential elections. Debt default, low foreign currency reserves, high inflation, an inflexible workforce and a contracting economy, characterise Argentina’s current problems. The three presidential candidates all promise a better future and, from a current low base, achieving a better standard of living for the population would not be difficult to attain.

It is clear Argentina has the potential to be a major regional economic power again if the right economic policies are implemented and sustained. Other frontier countries such as Pakistan have demonstrated in recent times the benefits of simple but sound economic policies and the impact they can have for stockmarket investors.

Pakistan had the first peaceful transition of power in the country’s history in June 2013. A new business-minded administration launched a large power construction programme, raised foreign debt, sold mobile telephone spectrum, and initiated a huge privatisation programme through the stockmarket. The economic benefits are already being felt and it is believed the economy is now on a sustainable growth trajectory of more than 6 per cent growth per year. This economic progress has started to be reflected in the performance of the stockmarket, which has now appreciated by nearly 50 per cent in US dollar terms since the new administration came to power.