We believe that these countries could offer upside potential.
Argentina – change is in the air
Argentina has suffered over the past four years due to poor economic policymaking. Having defaulted on the country’s debts in 2020, Alberto Fernández’s government later resorted to money printing to fund a large national deficit, pushing inflation as high as 115.6% in June.
It might seem strange, then, to consider Argentina as an investment opportunity. But there are a number of reasons for optimism.
First, Argentina has been investing in a vast shale gas reserve called Vaca Muerta. In the past, the country’s strength as an agricultural exporter has always been offset by the fact it was a net importer of energy. That is about to change. A shift to an energy surplus could help to stem the drain of dollars from the country and allow the importation of necessary goods to grow the economy.
Second, Argentina has national elections coming up in October. We anticipate that the government’s economic record will lead the public to vote for change, ushering in a more market-friendly government with more orthodox economic policies.
Finally, Argentine bonds are trading at very distressed valuations. The market has not greatly recovered from the default in 2020, and prices are sitting anywhere between 25 and 35 cents on the dollar. This means investors are reasonably protected on the downside, with positive catalysts potentially in the offing.
Turkey – a positive direction of travel
The case for Turkey may not be quite as clearcut but the country nevertheless deserves its position as “one to watch”.
Like Argentina, Turkey has suffered from unorthodox economic management. Over the years, President Erdoğan has frequently been reluctant to raise interest rates because of the effect on growth, and in current conditions that has pushed inflation as high as 85% at times.
He has also wanted to maintain a stable exchange rate, and the only way he has been able to do that is by spending the country’s FX reserves.
Turkey differs from Argentina in that its general election has already taken place, and Erdoğan remains in post. However, there are signs that economic policy is becoming more orthodox anyway. Mehmet Şimşek has been appointed to the finance ministry and Hafize Gaye Erkan to the central bank with a mandate to raise interest rates.
Accordingly, since June interest rates have risen 21.5 percentage point to 30%. Turkey has also been looking to tighten up public spending and reduce the demand-side stimulus introduced prior to the election.
This shift is interesting because Turkey benefits from very positive demographics and, as the bridge between Asia and Europe, a privileged geopolitical position in the world.
However, there is still room for caution. Markets have already given Erdoğan some credit for the policy shift, so valuations don’t look quite so attractive as in Argentina. Turkey also still has a long way to go in taming inflation, and Erdoğan has been known to tire of orthodox policy, so the road ahead may be bumpy.
Nevertheless, the direction of travel appears positive at present. Turkey may look expensive compared to other single B sovereigns, but if things continue to stabilise then we believe that we could see agencies upgrading their ratings or at least putting the country on a positive watch.
We also believe that there may be near-term opportunities in inflation-linked bonds given that substantial price rises are likely to continue for the next few months.
Ukraine – undervalued and set to rebound?
Ukraine is paying a heavy price for Russia’s invasion. Though there are occasional reports of its army making gains, the bloodshed and destruction continues.
The human costs of this are hugely significant. Yet as we turn to our investor’s perspective, there is actually quite a positive case to be made for Ukraine.
One reason for this is that Ukraine’s economy has performed much better than most people expected. The fundamentals have weakened but by nowhere near as much as the drop in valuations would suggest – since the conflict began, Ukraine’s sovereign bonds are down from around 100 cents on the dollar to just 25.
Alongside that, our view on the progress of the war is also relatively constructive. With Russia performing poorly on the battlefield, we see the potential for some sort of off-ramp or frozen conflict.
When the war began, Ukraine was forced to pause paying out on its bonds. If a resolution can be found, then we could foresee a debt restructuring at some point next year. We believe that this could mean valuations recovering to in excess of the current trading range of 25-30 cents on the dollar.
Bondholders will also have a role to play in financing any reconstruction work in a post-conflict Ukraine, and they are unlikely to be offered a punitive deal for doing so. One suggestion is that frozen Russian assets, or at least the returns accruing to these, could be used to subsidise the necessary work.
Timing one’s entry into this market will be challenging given the uncertainty, so one option investors have is to take up a position in these bonds ahead of time. At 25-30 cents on the dollar, the downside is naturally more limited.