One of the underlying theses of this trip was to see for myself the different drivers in each of the states that make up this vast and often overlooked continent, and go beyond the one-size-fits-all approach to emerging market investing that characterises that activity in the UK. The countries fail to disappoint in this regard; travelling to Peru after the modernity of Santiago was like visiting a country much closer to what one would consider a developing nation. The only thing that seems to unite all the countries I have visited so far is an inefficiency that we seem to have left behind long ago in our part of the world – checking in for a flight, for example, seems to take anything up to two and a half hours. Still, this is a sign that there is ample opportunity for productivity improvements.
Flying back down south to Argentina, we have moved again into a country that at first glance appears European. But this is not the Europe of the gleaming, skyscraper Canary Wharf variety that we witnessed in Santiago; Buenos Aires is more like a rather tired version of Paris, with buildings seemingly from a belle epoch, fin-de-siècle era giving a hint of the history of Argentina as a country that has so often in its life failed to live up to its promise.
At Tcam our focus is on delivering the right asset allocation for our investors, as this is the area where most returns are generated. It's therefore vital that we have a full understanding of what is steering markets around the world so that we can take advantage of inefficiencies and invest where we think particular asset classes are undervalued.
We have believed for some time that Latin American securities may be one such class – the market has overreacted in pulling money from the region, exaggerating the influence on the economy of falling oil and commodity prices, overemphasising political instability and under appreciating the region's ability to benefit from growth of the US economy.
This is the second in a series of blogs by Chief Investment Officer Haig Bathgate, as he tours South America to hone our investment thesis on the region, and find the drivers behind the main economies there.
A quick glance at history shows just how prosperous the country was at one stage and the statistics are truly staggering; in the half century leading up to World War I, GDP had grown at an annual rate of 6%, while the nation ranked among the 10 richest in the world. The 20th century wasn't as kind, and years of military repression and economic stagnation pushed the country down the rankings. It's almost as if Argentinians suffered from a certain complacency because they were so rich in natural resources – they just didn't have to try that hard. The end result was that a nation whose GDP per head was 50% higher than Italy's in 1909, had less than half that of Italy's by 2000. And while like all emerging nations it has benefited in recent years, it's still far too much identified with debt defaults and rampant inflation.
With that in mind, if investing in emerging markets is about laying aside preconceptions and looking for overlooked potential, then this country is a prime candidate. Nearly all of the business people I met there (including the chief economist of the central bank) were very impressive and keen for the country to throw off the shackle of past financial mistakes. Headline figures now are very positive; inflation is at about 17%, relatively healthy compared with the staggering 20262% reached in 1990. Gross government debt stands at 45% of GDP, compared with 68% for Brazil, 90% for the UK, 107% for the US and 159% for Greece. Still, it's fair to say this is due to the fact that few outsiders are prepared to lend to the country at an acceptable rate after it defaulted in 2001 (a massive $93 billion) and again last year.
While the administration of President Cristina Fernandez de Kirchner hasn't been a shining example economic reliability, with the budget deficit this year set to be the highest since 2001, the good news is that there is an election in October. Noises so far give the impression that the main candidates support both monetary and fiscal tightening. The prospect of better government, combined with an economic strength in the export of agricultural products, and a country that has been devalued due to the general decline in commodity prices, makes it a contender as a place that's worth investing in. The risk with Argentina is that they flunk the opportunity, as they have far too often in the past. My hunch is that this time the business and political establishment is unlikely to let that happen.
This content was generated prior to Turcan Connell Asset Management Limited operating as Tcam.