Fresh leaders may revitalise Argentina

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.

Nigeria is a recent example of an economy that has been severely held back by a corruption and incompetence. Oil theft over the past few years has been estimated at $20bn (£13.2bn) a year and with a budget that relies heavily on oil revenues, a large part of the windfall from high oil prices over the past 10 years has been wasted.

Recent Nigerian presidential elections have brought to power a new administration, with hopes the country can resume the path of serious economic, political and institutional reform.

From the aforementioned countries, only Pakistan is demonstrating the political will to put the right economic policies in place, many of which can be unpopular in the short term.

The Argentinian population has the opportunity this year to vote for the tough economic changes that would almost certainly lead to a much higher standard of living. Depending on which candidate is voted in, the change may well provide investors with a fantastic opportunity, but they need to see evidence of reforms before committing too heavily to this market.

Dominic Bokor-Ingram is portfolio adviser at Charlemagne Capital

EXPERT VIEWS

Jan Dehn, head of research at Ashmore Investment Management, on Argentina:

“Argentina will be a different place a year from now with a new and more pragmatic government. As Argentina returns to capital markets, the country’s index weight will rise considerably from today’s very low levels. The main near-term macroeconomic risk – a balance of payments crisis of Argentina’s own making – is receding due to a myriad of successful ad hoc capital-raising exercises by the government.

“The economic legacy of the [Cristina] Kirchner era poses a major challenge for the next government. Also, Argentina’s record of past defaults means that greater reliance on external debt going forward requires close monitoring. Still, debt sustainability and the government’s amortisation profile are benign after the country’s long exclusion from global capital markets.

“As locals are becoming more optimistic about the future, foreign investors are also likely to slowly begin to believe in a new Argentina.”

Kerry Craig, global market strategist at JPMorgan Asset Management, on frontier markets:

“Frontier markets are frontier for a reason. They’re very small. They’re very illiquid. They have a huge amount of political instability. Elections don’t always play out the way people want them to. Look at the Brazilian election last year – a lot of the change that was promised wasn’t delivered.”