J.P. Morgan Asset Management Takes Nine U.S. ETFs to Mexico

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JP Morgan Asset Management lleva nueve ETFs de EE.UU. a México
Yazann Romahi, Photo J.P. Morgan AM. J.P. Morgan Asset Management Takes Nine U.S. ETFs to Mexico

J.P. Morgan announced the expansion of its business in Mexico and the launch of nine US equity ETFs. Leveraging J.P. Morgan’s existing capabilities and expertise, the funds will be managed by an investment team led by Yazann Romahi, CIO of Quantitative Beta Strategies and Portfolio Manager at J.P. Morgan Asset Management. 

“The listing process of US ETFs in Mexico underscores our commitment to providing choice for Mexican investors, what believe are, some of the best and most innovative products to market,” said Juan Medina-Mora, representative in Mexico for J.P. Morgan Asset Management. “The ETFs allow investors to customize their portfolios in an effort to meet distinct outcomes, also considering currency-hedged alternatives.”

The funds, which are designed to provide exposure to traditional indexes for better risk-adjusted returns, are:

  • J.P. Morgan Diversified Return Global Equity (JPGE): The fund is designed to provide global equity exposure with potential for better risk-adjusted returns than a market cap-weighted index. It tracks the FTSE Developed Diversified Factor Index.
  • J.P. Morgan Diversified Return International Equity (JPIN): The fund tracks the FTSE Developed ex-North America Diversified Factor Index, which utilizes a rules-based approach combining risk-weighted portfolio construction with multi-factor security screening based on value, low volatility, momentum and size factors.
  • J.P. Morgan Diversified Return International Currency Hedged (JPIH): The fund is designed to provide core developed international equity exposure with potential for better risk-adjusted returns than a market cap-weighted index. It tracks the FTSE Developed ex North America Diversified Factor 100% Hedged to USD Index.
  • J.P. Morgan Diversified Return Emerging Markets Equity (JPEM): The fund is designed to provide emerging markets equity exposure with potential for better risk-adjusted returns than a market cap-weighted index. It tracks the FTSE Emerging Diversified Factor Index.
  • J.P. Morgan Diversified Return U.S. Equity (JPUS): The fund tracks an index whose methodology is designed in an effort to capture market upside while providing less volatility in down markets compared to a market cap-weighted index, the Russell 1000 Diversified Factor Index.
  • J.P. Morgan Diversified Return U.S. Mid Cap Equity (JPME): The fund is designed to provide U.S. mid-cap equity exposure with potential for better risk-adjusted returns than a market cap- weighted index. It tracks the Russell Midcap Diversified Factor Index.
  • J.P. Morgan Diversified Return U.S. Small Cap Equity (JPSE): The fund is designed to provide U.S. small-cap equity exposure with potential for better risk-adjusted returns than a market cap-weighted index. It tracks the Russell 2000 Diversified Factor Index.
  • J.P. Morgan Diversified Return Europe Equity (JPEU): The fund is designed to provide developed Europe equity exposure with potential for better risk-adjusted returns than a market cap- weighted index. It tracks the FTSE Developed Europe Diversified Factor Index.
  • J.P. Morgan Diversified Return Europe Currency Hedged (JPEH): The fund is designed to provide developed Europe equity exposure with potential for better risk-adjusted returns than a market cap-weighted index. It tracks the FTSE Developed Europe Diversified Factor 100% Hedged to USD Index.

J.P. Morgan Asset Management’s ETF suite in the U.S. features 22 product offerings with over 4 billion dollars in assets under management. J.P. Morgan achieved a top ten position in flows in the U.S. across smart beta ETFs in 20161. J.P. Morgan was also named one of the “Most Trusted” ETF providers according to Cogent Reports’ 2016 Advisor Brandscape report

While Mexican Presidential Candidates Propose Nothing To Amend The Pension System, Fundamental Improvements Are Required

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Los candidatos presidenciales en México no hablan sobre enmiendas al sistema de pensiones. ¿Qué se requiere?
Pixabay CC0 Public DomainSecond Presidential Debate. While Mexican Presidential Candidates Propose Nothing To Amend The Pension System, Fundamental Improvements Are Required

In countries with less sensitive problems because of low pensions, presidential aspirants usually propose improvement measures, general reforms to mitigate disadvantages for former workers, and modifications aimed to avoid poverty for those who are still active. In Mexico, candidates to executive power have not expressed their proposal, if they have it, to rectify the expected retirement conditions of affiliates to the local pension system, SAR. 

Insufficient pensions for current workers are expected, even with higher contribution

What do we have to ask to candidates? In some opportunities it has been repeated that with current mandatory contribution (CR) and applying composed profitability, the pretended replacement rate (RR) of workers could be as higher as 26%, clearly exiguous to lead a decent life. If the CR were to be increased now to 14% –a net rate of 13.0% after fees– and the annual weighted average profitability were 4%*, those who began their working life along with the SAR and accumulate uninterrupted contributions and returns in 21 years could consider their pension will be equivalent to around 45.5% of their last salary (or 53% if we assume annual returns of 5% instead of 4%). The 45.5% of RR is the consequence that half of the active life of these affiliates has already gone (so, 0.5% of active life over 26% of expected RR = 13%), and of taking into account that the new quota plus the next profitability would only influence the remaining years of work, provided that they do not go through periods of unemployment (so, 0.5% over RR of 65.0%= 32.5%). 

If we start from the basis that the reform to the Chilean system was proposed by the fact that the RR of retirees did not reach the 80% projection of their last salary, this supposed increase in the CR of the SAR would be clearly insufficient for the Mexican workers’ pension to meet the necessary expenses in their retirement. Under these parameters, those who have few time of affiliation could aspire to higher pension tan 45.5%. In its case, the expectation of RR of 65% (through annual returns of 4%) or 80% (through returns of 5%) could only be reached by the new affiliates, those who began to work together with the application of the new CR.

With this simple thought –and the mirror of the Chilean model–, it can be realized that the increase of 115% of the contribution, from 6.5% today, without other complementary measures, would not solve the trouble of those who already have a working path. Assuming that the pension equivalent to 65% of salary, trough returns of 4% it would be taken as adequate by the future affiliates then it is clear that two kind of measures have to be determined; if that were not the case, there would be more problems and more solutions would have to be demanded. 

Inquire to candidates in the remainder of the campaign

In the way that it is worrisome the candidates have not spoken, it baffles that those affected, nor the media, have demanded proposals or ideas for amendment. In other countries, a large proportion of voters decide according to pensions.

It would be believed that the man who was minister of Finance (in two six-year terms) would be able to make proposals or outlines of corrective projects; not just because his technical career but also because the influence he had over Comisión Nacional de Ahorro para el Retiro: the head of Finance is member of the Governing Board of the Commission, which in turn is attached to the ministry as a decentralized body. Even with that he has not made a single allusion to SAR.

That does not exempt the other aspirants, that considering they do not have experience in the sector are supported by teams that know the issues and worrying aspects of the country, and could be sensitive to the problem and commit to amend it.

The insufficiency of the RR is one of the concerns, but not the only one, about the pension system. There are other pending. Is exposed because it is the core, which will constitute the pension itself, the amount on which the sustenance will depends since retirement. In the remainder of the campaign, it is desirable that workers, media and academics inquire about it to the candidates.

____________________

* Please see “Aumento en la Contribución del Sistema de Retiro en Chile: Beneficios e Implicaciones”, Fitch Ratings. October 16, 2017.

Column by Arturo Rueda. English version by the author

Robeco Appoints Bart Oldenkamp as Head of Investment Solutions

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Bart Oldenkamp, nuevo jefe de soluciones de inversión de Robeco
Pixabay CC0 Public DomainRobeco, courtesy photo . Robeco Appoints Bart Oldenkamp as Head of Investment Solutions

Robeco has hired Bart Oldenkamp as Head of Investment Solutions, effective July 1st, 2018. In this role, he will be responsible for further expanding Robeco’s Investment Solutions business, which includes services such as fiduciary management and multi-asset solution products.

He will succeed Martin Mlyná, who currently holds this role, while also serving as Managing Director at Corestone, Robeco’s manager selection platform. As from 1 July 2018 he will focus fully on his position at Corestone to further increase its added value for clients and to further grow Corestone’s multi-manager business.

Gilbert Van Hassel, CEO of Robeco, said: “I welcome Bart to Robeco; in him we have found a highly experienced professional to fulfil this crucial role for our clients with a strong network and reputation in the area of fiduciary management and investment solutions. This appointment underlines our commitment and ambition to grow our fiduciary business, which is a key element of our strategy for 2017-2021.”

Oldenkamp said: “I am excited to join Robeco and I am looking forward to working together with clients to achieve their financial objectives. I am confident that based on Robeco’s strong academic and research driven approach we will be able to further strengthen our solutions for clients and achieve sustainable growth of our business.”

He previously worked at NN Investment Partners, where he was Managing Director Integrated Client Solutions. Before that, he headed the Dutch office of Cardano, a consultancy firm specialized in fiduciary management, risk management and investment advisory services, after having held various positions at ABN Asset Management, including Global Head of LDI & Structuring and Product Specialist Structured Asset Management in the US. He is the academic director of the Pension Executive program at the Erasmus School of Accounting & Assurance, and a non-executive board member at the pension fund for the Dutch railway transport sector. He holds a PhD in Econometrics from Erasmus University Rotterdam.

Itaú Unibanco Celebrates 21 Years of Listing on the New York Stock Exchange

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Itaú Unibanco celebra 21 años en la Bolsa de NY
Photo . Itaú Unibanco Celebrates 21 Years of Listing on the New York Stock Exchange

Itaú Unibanco is celebrating 21 years of listing on the New York Stock Exchange (NYSE), the largest exchange by trading volume. To celebrate the date, Itaú received the honors at the traditional “closing bell” ceremony, which marks the conclusion of the trading day on the NYSE. At the event Candido Bracher, Chief Executive Officer of Itaú Unibanco; Eduardo Vassimon, General Director – Wholesale; Caio David, Executive Vice President, Chief Financial Officer (CFO) and Chief Risk Officer (CRO); Alexsandro Broedel, Executive Officer for Finance and Investor Relations; and Christian Egan, Executive Officer for Global Markets and Treasury as well as Roberto Setubal, Co-Chairman of the Board of Directors were present.

“The fact that we have shares traded on the New York Stock Exchange has contributed to the bank’s growth and made us better known around the world, helping us to expand the number of foreign investors among our shareholders. We are very satisfied with the results of these 21years of listing”, says Candido Bracher.

During this period, the shares of Itaú Unibanco (identified by the ITUB ticker symbol) have been turning in a consistent annual performance, appreciating on average by 16% (considering the reinvestment of dividends) and with a recurring return on equity of 24.4%. Over the period, US$ 32.7 billion has been distributed in dividends and Interest on Capital, net of income tax.

In the first quarter of 2018, Itaú’s shares recorded average daily trading amounts of, R$ 535.3 million (US$ 161.1 million) on the NYSE and R$ 724.7 million (US$ 218.0 million) on the Brazilian stock exchange, B3, and totaling R$ 1.3 billion (US$ 379.1 million). The total trade volume was 41.5% greater than the same period in 2017. On B3, growth was 68.7% and on the NYSE, 16.2%.

Pioneering spirit and appreciation

Unibanco was the first Brazilian bank to trade its shares on the New York Stock Exchange in 1997. Itaú launched its American Depositary Receipt (ADRs) program on the NYSE in 2002. Following the merger of Unibanco with Itaú in 2008, the shares of the two banks were unified.

Currently, 67% of the 3.2 billion preferred shares of Itaú Unibanco pertain to foreign investors, 38% trading on B3 and 29% on the NYSE. The remaining 33% belong to Brazilian nationals and were traded on B3. The numbers reflect shares in the free float, that is those free for negotiation in the market and excluding those shares in the hands of the controlling shareholders or held as treasury stock.

This performance is the outcome of a transparent agenda in the relationship of Itaú Unibanco with the capital markets started in 1996, with presentations in the United States and Europe for disclosing the bank’s corporate governance practices and for emphasizing its respect and consideration for its shareholders.

“The sustainability of any organization depends on how it interacts with its employees, clients, shareholders and society in general. For this reason, we run a far-reaching agenda of events and meetings for understanding investor requirements and to disclose the strategies and results of our businesses, based on clarity, transparency and on a long-term vision”, says Caio David.

Itaú Unibanco has 121 thousand direct shareholders and a further approximately 1 million indirect shareholders through participation in Brazilian investment and pension funds which hold the institution’s shares.

In the past three years, Itau contributed Value Add to the economy of R$ 189.4 billion (US$56.9 billion), distributed as remuneration to the employees (30%); taxes, charges and contributions (30%); profits and dividends to all shareholders (19%); reinvestments in the operations of the bank (19%) and rents (2%).

New Cycle

In September 2017, the bank changed the maximum limit for payment of Dividends and Interest on Capital, and previously set at 45% excluding share buybacks, introducing a payout (percentage of net profit distributed to the shareholder) of 83% (including buyback of its own shares). In the light of the new remuneration practices, Itaú’s shares have now also become attractive to investment and pension funds where the strategy is to prioritize assets with higher levels of payout and efficient capital management.

In 2017, the bank distributed US$ 5.3 billion in dividends and interest on capital, the result of a recurring net income of US$ 7.5 billion. 

Puente Will Exclusively Distribute a Partners Group Vehicle in Argentina, Uruguay and Paraguay

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Puente anuncia un acuerdo de distribución exclusiva con Partner Group, especialista en mercados privados
Pixabay CC0 Public DomainFederico Tomasevich, CEO at Puente. Puente Will Exclusively Distribute a Partners Group Vehicle in Argentina, Uruguay and Paraguay

After the new Argentine legislation allows Argentine investors to operate financial instruments abroad, provided that they have a local agent as a link to the operation abroad. Puente announced an agreement with Partners Group, one of the leading investment groups in the world, to exclusively distribute one of its innovative investment instruments in Argentina, Uruguay and Paraguay.

“We are very excited about Partners Group’s decision to choose us as its exclusive partner in Argentina, Uruguay and Paraguay, which further strengthens our investment platform, particularly in terms of alternative investments. It presents an opportunity to those that seek to diversify their portfolio, maximizing their capital through investments in private equity, real estate, private debt, and infrastructures. This strategy allows the investor to access dollar returns that aim to be above most of the options available today in the market, with investments with lower volatility and that have a low correlation with traditional markets,” said Federico Tomasevich, President of Puente.

With its head office in Switzerland and 19 offices around the world such as New York or Houston, Partners Group manages more than 74 billion dollars in assets invested in private equity, real estate, private debt and infrastructure projects.

“Partners Group, through Puente, makes available to the Argentine, Uruguayan and Paraguayan investment market, a modern and efficient investment alternative that gives access to Puente’s clients to investments in private markets, which are typically only accessible to large institutional investors. We are very enthusiastic about this agreement with Puente, a renowned institution in the markets in which it operates,” said Gonzalo Fernández Castro, Head of Private Equity for Latin America at Partners Group.

Puente has over 3,400 million dollars in assets under management.

Above 3%. Is the Party Over?

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Superado el 3%, ¿se terminó la fiesta?
Wikimedia CommonsCourtesy photo. Above 3%. Is the Party Over?

It has been a long time coming but we have finally been given a wake-up call: the 10-year US Treasury bond yield has gone above 3%. So, now what? Should we prepare our fixed income portfolios to hedge interest rates in case of further hikes? Or should we increase the duration to take advantage of potential corrections below 3%?

In a time before Central Banks routinely employed cash injections and mass bond purchasing, textbooks on macroeconomics traditionally taught that 10-year yields responded to a simple formula: expected growth + inflation expectations. So, if we consider just these two factors and we believe the consensus forecasts for the coming years are valid, we could conclude that we will soon be grazing the 5% mark for the 10-year US Treasury bond. The reality is not all that simple and recent years have served to cast doubt on some of the principles we learnt during our studies, as they reflect a new reality in the interrelationships among economic variables. For instance, after several years of unlimited liquidity, inflation is only now beginning to rise slightly or even though the Federal Reserve increased official rates and four hikes are expected for this year, the dollar has weakened.

Some official projections for US economy growth include: IMF: 2.9% for 2018 and 2.7% for 2019; and OECD: 2.9% for 2018 and 2.7% for 2019. Yes, the figures look good. No doubt about it. But they do not point to accelerated growth that could justify inflationary pressures and aggressive rate hikes and we cannot rule out the possibility that these forecasts will fall in the coming quarters. After 35 straight quarters of economic expansion in the US, we may beat the record of 39 quarters set in the 90s, which culminated in the technology bubble (“dotcom”). Let’s face it, until Trump’s fiscal stimulus peters out, the tailwind will continue to blow for consumption, investment expenditure and the real estate sector. However, we are not looking at an abrupt rally, but an ongoing slow and steady pace for growth. In other words, even if we stick to the traditional factors that we mentioned, which determine the 10-year yield, we are not anticipating an environment that justifies much higher rates than now. We might also add other “non-traditional” factors into the equation, such as the impact of the behaviour of some very influential players in the sovereign debt market like China (largest foreign holder of US Treasury bonds), insurance companies and sovereign wealth funds.

Nor are we convinced by those who predict an imminent recession and a return to yields below 2% for the 10-year US bond. One of the arguments that has become popular among proponents of this position relates to the yield curve inversion. That is to say, a lower interest rate for the 10-year than the 2-year bonds. Historically, the inverted yield curve has been one of the best indicators of recessions. In fact, all the recessions suffered by the US since the 1960s have been preceded by yield curve inversions. Recently, the slope has reduced, but there is still a 50-basis point spread between the 10-year and the 2-year bonds. And we believe that this reduction is due more to the non-traditional dynamics that we have mentioned, which are sustaining the 10-year yield level, than to signs of an imminent recession.

And what about the voices warning us of another consumer delinquency crisis caused by official rate hikes? The market is discounting a total of four rate hikes by the Federal Reserve for this year. Despite the rise in the short rates, which brings an increase in consumer credit costs, we are still not seeing alarming increases in the delinquency rate among the various classes of consumer loans. If rates continue to increase more aggressively, we could indeed see this but, for now, it is not our base case.

Even if we think that the rate hikes will not be sufficiently aggressive to rain on our parade, we do need to be prepared for unexpected summer downpours. We choose not to fully hedge interest rate risk, but we are carefully looking at the relative value and potential risks. With a spread of just 15 basis points between the 5 and 10-year US Treasury bond yields, can we justify assuming an additional 4 years of duration risk? We do not think so.

Column by Meritxell Pons, director of Asset Management at Beta Capital Wealth Management, Crèdit Andorrà Financial Group Research.

Indosuez Wealth Management Looks to Expand in Mexico and Has Hired Ignacio López-Mancisidor for Miami

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Indosuez Wealth Management prepara su expansión en México y ficha en Miami a Ignacio López-Mancisidor
Wikimedia Commons. Indosuez Wealth Management Looks to Expand in Mexico and Has Hired Ignacio López-Mancisidor for Miami

Ignacio López-Mancisidor has recently joined the offices that Crédit Agricole Indosuez Wealth Management has in Miami, as relationship manager.

In his new responsibilities, he will report to Jon Diaz Valdenebro, managing director of CA Indosuez Wealth. Both professionals met when they worked at Santander Private Banking International.

CA Indosuez is also fueling its large clients business in Mexico. Credit Agricole already had a presence in the country through CACIB, the Corporate and Investment Banking division of the French bank, but the expansion will now be under its own brand, Indosuez Wealth Management.

Both López-Mancisidor and Valdenebro are part of the team led by Mathieu Ferragut, CEO and head of the division of Indosuez Wealth Management in the Americas and member of the Executive Committee of the firm.

López-Mancisidor arrives from Noctua Partners, an independent wealth management firm based in Miami, where he has spent his last year of his career. He also developed a large part of his professional career at Santander Private Banking International.

He has a degree in Media Management, with a specialty in Communication and Economics from the University of Miami, and a master’s degree in Corporate Communication from the Instituto de Empresa.

Credit Agricole Private Banking has about 100 specialized employees in Miami at its offices at 600 Brickell Avenue, dedicated to wealth management for the clients of Indosuez Wealth Management.

The Sixth Edition of the Mexico PE Day in New York is Approaching

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Se acerca la sexta edición del Mexico PE Day en Nueva York
Pixabay CC0 Public DomainPhoto: hotel Le Parker Meridien. The Sixth Edition of the Mexico PE Day in New York is Approaching

The AMEXCAP is organizing its sixth Mexico Private Equity Day in New York. The event will take place between June 6th and June 7th at the hotel Le Parker Meridien.

The main objective of this flagship event is to attract foreign investments in Mexico, as well as cement bonds and develop synergies between players operating in Mexico and international participants. The most dynamic LPs, GPs and specialized advisory firms will share their experiences in the Mexican PE market.

Mexico has yet to face several challenges in 2018. Among the most important ones are the resumption of the NAFTA negotiation rounds, as well as the Presidential elections in Mexico. However, 2017 was a great example of Mexico’s strength, as it faced many adversities, emerging victorious from pessimistic economic forecasts, protectionist policies from the US Government and two major earthquakes.

To register with the 25% discount on the non-member rate follow this link and use the code: ULPE191A103.

Funds Society Launches a Charity Campaign

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Funds Society convierte su sección Rincón Solidario en un motor para el cambio
Funds Society's Charitable logo. Funds Society Launches a Charity Campaign

Since Funds Society began the publication of the three editions of its magazine, in Spain, the offshore market and, since this year, for the Latin American region, it has told the stories of numerous NGOs that, in some way, are linked or supported by the firms and professionals in the investment fund sector.

Now, our publication goes a step further and has decided to support the NGOs that go through this section with an online advertising campaign. The objective of this campaign is to grow the NGO’s visibility in our readership with a banner under the slogan ‘Solidarity Corner: Together we will make it possible’.

Funds Society will be donating 10% of its publicity impressions of the MPU format during eight weeks to the foundation that was featured in the Rincón Solidario or Solidarity Corner section in the magazine. As is logical, these banners will direct the reader to the official website of the NGOs so that they can learn more about their activity and the groups they serve; as well as collaborate with them, if they wish to do so.

This quarter, the protagonist in Spain is the Association of Relatives and Friends of Children with Cancer (Afanic), an entity that aims to cover the diverse needs that hospitalized children present at both medical and psychological, educational and recreational levels. The organization interprets that these are basic needs to enable their expected recovery and give adequate attention to their families. José Miguel Maté, CEO of Tressis, has run numerous marathons to raise funds for his cause, and collaborates with them closely.

In the case of the offshore market, this space is assigned to the Adam J. Lewis School (AJLP), a non-profit institution created in 2013 in tribute to Adam Lewis, who died on September 11. In this school, 18 children between three, four and five years of age study under a model that mixes Montessori, Piaget and Reggio Emilia techniques. By 2018, their goal is to double the size of the school and for that, they are looking to grow their donations considerably. Supporting them in this effort, is Richard Garland, director of Investec, who is running seven marathons in seven continents to raise 100,000 dollars, contributions he is planning to match.

Finally, in the Latin American region the featured NGO is Los Tréboles, an educational center, located in Montevideo. This center is winning the battle against school dropouts, one of the biggest educational problems in Uruguay. The NGO, which is financed in 40% by private donations (45% contributed by the State) serves 120 children and 40 teenagers from the Flor de Maroñas neighborhood. They have been  20 years in the area and in 2017 they managed to get only 1.5% of those attending the place to repeat the course.
 

Ampliar

According to Experts, Argentina’s Request for Help from the IMF is a Precautionary Measure and, as yet, There is no Risk of Default

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La petición de ayuda de Argentina al FMI es una medida de precaución y aún no hay peligro de default, dicen los expertos
Wikimedia CommonsPhoto: JoseTellez, Flickr, Creative Commons. According to Experts, Argentina's Request for Help from the IMF is a Precautionary Measure and, as yet, There is no Risk of Default

Mauricio Macri, President of Argentina, announced on Tuesday that he has begun talks with the International Monetary Fund (IMF) to receive a “financial support line” for the situation which has been generated in that country due to the strong depreciation of the peso against the dollar in a difficult global context, marked by the rise in US interest rates and the potential revaluation of the American currency against some currencies of the emerging world. And mainly against countries that, like Argentina, depend heavily on external financing.

“I have made this decision thinking of the best interest of all Argentines, not lying to them as has been done so many times (…).I am convinced that fulfilling commitments and moving away from demagoguery is the way to achieving a better future,” said Macri yesterday, trying to instill tranquility in the markets. Investors fear that this situation will negatively impact the country’s debt, and may even infect the markets of other emerging economies, and by proximity, those of Latin America

Last Friday, in a new attempt to defend the exchange rate of the peso against the dollar, the Central Bank of the Republic of Argentina (BCRA) decided to raise the reference interest rate to 40%, less than 24 hours after it had raised the price of money to 33,25%. Therefore, the central bank increased the benchmark rate by 675 basis points in less than a day, in what represents the third increase in the price of money last week, thus raising the benchmark interest rate to 40% from the 27, 25% rate of the previous week.

Precautionary measure

The new aid measures aim to alleviate this situation. For Alejandro Hardziej, Julius Baer’s Fixed Income analyst, this is a “precautionary” measure: “It seems that Argentina is negotiating a line of credit as a precautionary measure to cover potential financing needs without having to go to the international debt markets in a scenario of rising loan costs and greater risk aversion of investors to emerging markets,” he explains. In his opinion, the movement”doesn’t reflect an underlying liquidity problem but it’s a government move to calm investor’s fears and reduce pressure on the currency, the Argentine peso”

“The fact that Argentina has gone ahead and asked the IMF for help is a good sign, as it can help because things are being done properly, despite the fact that it damages Macri’s image”Alejandro Varela, Portfolio Manager at Renta 4 Gestora.

For Amílcar Barrios, Tressis analyst, “Argentina resorts to the IMF toget a line of financing that the market is denying it, owing to the extensive and disastrous financial history accumulated by that country, regardless of who governs.”

Claudia Calich, Fund Manager of the M & G Emerging Markets Bond fund, pointed out that, in the last two months, the Argentine peso had become more expensive in real terms, following the strong flows received from international investors in 2017. “These capital flows caused the ratio of nominal exchange to depreciate much less than inflation.” But the tide began to change at the end of last year, when, in her opinion, the country’s Central Bank committed the political error of raising the inflation target for 2018, from 10% to 15%, so that adjustment allowed the entity to cut rates at the beginning of January, something that undermined its credibility and raised concerns about whether monetary policy is free from government interference. “Another political error was the announcement of the 5% tax on Treasury investments in Argentine pesos, which had an impact both on local and international investors and led to a reduction in investments in public debt in pesos,” the expert explains.
A higher reading of inflation and a stronger dollar generated strong pressure on the country’ currency, explains the asset manager, so the Central Bank realized the need to restrict monetary policy, with three emergency increases, until the 40% mentioned above. “I think that monetary authorities will now be successful in slowing down the depreciation of the currency,” she explains. Calich argues that the overvalued peso is also contributing to expand the country’s current account deficit by up to 5% but, in this situation, she expects it will begin to reduce as the peso moves towards equilibrium. “The implications will be higher inflation this year and possibly the next one, lower growth, and a further decline in Macri’s popularity.”

But without default…

On whether or not it’s a default situation, she believes that “not yet. I see this as a re-pricing of Argentina’s risk, which had started at the beginning of the year, along with sales in the emerging debt market in both local and strong currency,” she explains.

She also speaks of two glimmers of hope for Argentina: First, the next elections will not be held until January 2019, so authorities have time to take their “bitter medicine” this year, but it will lead to a readjustment of the economy in 2018. Secondly, the IMF can intervene with an aid program if the Latin American country loses access to the capital market or if there is some type of crisis caused by the outflow of capital (unlike other markets such as Venezuela), something that it considers positive. “Argentina and the IMF have had a tumultuous relationship in the past but the objective this time would be to ensure stability so that Argentina does not return to its failed populist policies under a new administration,” she adds.

A Warning Sign?

However, we must not lose sight of the situation of emerging markets… especially those with fundamental weaknesses. This advice comes from Paul Greer, Asset Manager at Fidelity, who explains that the South American country has reached this point largely due to the strengthening of the dollar and the increase in the profitability of US fixed income.
“As with the caged birds that serve as a warning for gray gas in the mines, Argentina is a wake-up call to investors positioned in emerging markets with weak fundamentals. These types of assets do not get along well with an increasingly strong dollar. The recent price situation illustrates how quickly [investor] sentiment can change,” he says.

Impact on Spain

Luis Padrón, an analyst at Ahorro Corporación, believes that Argentina’s problem “seems to be more structural than a currency problem.” Regarding Spain’s exposure to this market, he points out “how much the situation regarding the exposure that Spanish companies have had in this market has changed”, going from being one of the countries with greater exposure to having a very reduced exposure in the business of the companies.”Only Día, Centis and, to a lesser extent, Telefónica are ‘suffering’ the impact of this situation”, he adds (see Ahorro Corporación’s table below).

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