Investing In South America - Argentinian Stocks (Part 4)

The New Libertarian Eldorado?

Wasted Potential

When looking to invest in South America, one country will automatically catch your attention: Argentina.

At the turn of the 20th century, it was richer on a per capita basis than most Western European countries.

It is also a massive country, the 8th largest on Earth, with massive agricultural production, mining resources, and even massive energy generation potential, including hydro, wind, solar, oil, gas, lithium, etc.

Today, it has entirely wasted this potential, with rather abysmal development statistics:

• 44% of the population lives under the poverty line.

  • 54.2% for children under 15 years old.

• Inflation of 100%+. After multiple bouts of hyperinflation, a new peso was introduced in 1992.

  • It went from 1 peso = 1 USD in 1992 to the current 821 official rate (and even worse unofficial rate)

This was brought on by decades of poor economic policies, with periods of full-blown socialism only interrupted by brutal military dictatorships. Argentina’s economic history is why people say “You don’t invest in South America” on steroids.

So you would expect this to be an indiscriminate slaughter for investors, right?

But like all South American stock, managing the political risks is the key part.

With the chainsaw-waving libertarian Javier Milei now president of Argentina, will the country enter a new golden age?

Judging Argentina’s Political Risk

As explained before, in South America the lowest investment risk is when politics is at its worst.

This is because valuations are at their lowest when destructive socialist policies and dramatic inflation are raging freely.

From that kind of bottom, there is only one way, which is up.

Alternatively, good policies rarely last in the continent, so a sound economic policy, combined with a high valuation multiple leaves only one way to go from such a high, which is down (often -70% to -90%).

For more details on this strategy, see the corresponding article:

The same held true for Argentina. When I bought shares of Cresud (CRESY) 2 years ago, the valuation had a little rebounded from the pandemic lowest, but no one wanted to look at Argentina.

The mantra “never invest in Argentina“ was at its strongest.

But really, a global pandemic and a currency collapse could not put Cresud below the $3/share mark. The company was still making a profit in that period as well. So what could?

This was a low-risk point, not as low as 2020 but close.

Since Milei has been elected, I am getting people asking me NOW if they should invest in Argentina.

And my answer is yes, but with realistic expectations. Taking Cresud as an example, the stock is already up 3x since its lowest point. It still has a x2 potential to go back to its previous peaks.

So are there plenty of undervalued Argentinian companies with still a 2-3x upside potential?

Absolutely.

Is it the best moment to invest in Argentina?

Probably not, that was 2-3 years ago, when no one wanted to hear about it.

A Light Of Hope

What I said about the political risk playbook holds true. But let’s remember that politics in South America is a pendulum. The further to one side it swings, the more to the other it will swing as well.

This is true in terms of position (the most communist it has been, the further right it will swing), but also in terms of time.

Argentina was an economic basket case for DECADES, being looked at with dismay by all its neighbors. It had the second worst policies, only beaten by Venezuela.

So the election of a man like Milei is a true earthquake.

It shows that the people are now so tired of having gone to the deep end of one side of the political spectrum that they want the exact opposite. And they want it HARD.

So I expect that Milei or another figure similar to him will be the average face of Argentinian politics for several years if not a decade or two.

Maybe Milei's government collapses, and a Peronist replaces him. But then someone even MORE radical will replace him.

Overall, we can expect the pendulum to swing right, to do so violently, and to do so until at the very least 2030.

So we might see discussed about 10 years in the future the “Argentinian Miracle”.

As always, the rule is that the day a country is on the cover of The Economist, it is time for investors to take cover before it blows up.

Just a reminder of how it looked for Brazil, with the perfectly timed wrong opinion EVERY SINGLE TIME:

Interestingly, excellent investors like Kuppy at Praetorian Capital started looking at Argentina in the summer of 2023. You can follow the link for a brilliant discussion on the topic, in a humourous and informative tone that I can only dream to replicate one day as a writer.

Argentinian Stocks