Cristina Fernandez de Kirchner has led Argentina into an economic mess, but value investors should pay attention, says Jim Grant in a recent issue of Grant’s Observer: in the near future Argentina could do not one favor for value investors, but two.
Argentina can’t get any worse
For value investors seeking to invest in bargains, a strategy known in algorithmic trading as investing in a drawdown, Argentina is almost a perfect case in point. “Like Russia, Argentina is so bad it almost can’t get any worse,” Grant noted, citing one of the tenets on investing in a mess of a situation and betting on the turnaround.
Grant muses that Kirchner could do value investors two favors: one for creating a situation in which the value investor could pick from the bones and easily find diamonds in the rough. The second favor is she could leave office, which could improve the economy she has wrecked.
“In misgoverning, she’s wrecked the economy,” Grant observed. “By stepping down, she’ll improve it.”
Grant notes the disaster upon which Kirchner currently rules: Power outages are a recurring theme, real estate sales down 20 percent, the free-market Argentine peso is at new lows against the U.S. dollar and inflation is at absurd levels, that is if you pay attention to the real numbers. “The unofficial – therefore, reliable – inflation rate is running near 40 percent,” Grant dryly observed.
Argentina negotiating with hedge fund holdouts
Grant notes there are three contenders jockeying for Kirchner’s spot, all of whom generally agree on key topics, which interestingly includes negotiating with hedge fund holdouts such as Paul Singer as opposed to giving him the silent treatment.
Those who are keen to the potential in Argentina’s economic mess point to development of the country’s vast Vaca Muerta shale oil and gas formation, one of the world’s richest. But it can’t be developed without financing and money – something Argentina currently lacks.
In a way, investing in Argentina is similar to investing in Alabama beachfront property immediately following the BP plc (ADR) (NYSE:BP) (LON:BP) oil spill in the gulf. In fact, Grant notes that the same hedge fund who invested in such disaster plagued real estate mentioned the investment thesis in Argentina.
Noting the value at one level, the article points out land for commercial development are back to levels not seen since the late 1990s – and nearly one third the price of comparable investments in other Latin American countries. From an investment standpoint, a move to economic normalization could see land prices increase three to four times in value.
Argentina isn’t an investment for everyone, as properly deploying capital is best done professionally by those who have the local knowledge and enough capital to properly diversify. But investing on a drawdown, as is the case with Argentina, has reduced downside potential – there isn’t much further lower to go – and the path to the upside seems clear.