Argentina’s capital markets are volatile. Frequent economic and political upheavals have wiped out gains all too often, discouraging investors from trading and companies from going public. Last year, the country’s benchmark stock index lost more than half of its value in dollar terms as the currency crashed and inflation accelerated, eroding two years of gains. It rebounded early this year, only to fall to a new low in May.
No wonder Argentines prefer dollars and real estate to grow their money. “The conditions for investing in Argentina have not been good for the past 20 years,” says Daniel Maselli, a financial advisor at Balanz Capital Valores, a broker in Buenos Aires. “This keeps people away from the stock market.”
The result: Argentina’s market capitalization of listed companies was just 17% of GDP in 2017, half that of the 35% to 45% racked up by Brazil, Colombia, Mexico and Peru — and puny compared with Chile’s more than 100% ratio, according to the latest data from the World Bank.
Alejandro Berney wants to change this. He is the CEO of Bolsas y Mercados Argentinos, or BYMA, the operator of the Buenos Aires Stock Exchange, and he says the target is to reach the levels of Colombia, Mexico and Peru.
“The opportunity is very big,” he says.
A boost is coming from positive real interest rates, which have returned under the government of market-friendly President Mauricio Macri after running below inflation 85% of the time over the past three decades, he says. The benchmark interest rate, the Leliq, has been more than 10 percentage points above inflation this year.
“With positive real interest rates, savings are going to come and the attraction of investing in stocks is going to increase,” Berney says.
To capitalize on Argentine free cash flow, BYMA is creating more products. In January, it launched a new methodology for calculating its stock indices in partnership with New York-based S&P Dow Jones Indices, the world’s biggest index provider and caretaker of the iconic S&P 500 and Dow Jones Industrial Average. S&P is now running BYMA’s renamed S&P Merval benchmark index and four other Argentine stock indices. Rather than measure liquidity as was done before, the new products use a free-float market capitalization to weight the companies on the indices.
The next step is to create focused indices, starting this year with energy and financial services, the most represented and liquid sectors in the market, Berney says.
“We would love at some point to have a technology index or an agriculture index, but we don’t have enough public companies in those sectors yet,” he says. “We need at least 10 companies in order to create an index.”
Focused indices allow asset managers to more easily allocate funds to sectors that they think will grow, Berney says. For example, an energy index makes it “very simple” for investors to overweight the sector if they expect it to grow on the back of the increased development of the Vaca Muerta, the country’s biggest shale play.
At the same time, he says, sector indices allow investors to use futures to hedge their positions against losses, adding more liquidity and sophistication to the market by creating new ways to exploit price differences.
A more basic benefit of sector indices is that they shine a spotlight on companies for the investment world. Increased visibility opens opportunities to raise capital through additional share sales.
Alejandra Naughton, CFO of Grupo Supervielle, a leading bank that trades on the Buenos Aires and New York stock exchanges, says inclusion in an index puts a company “in the sights of the portfolio managers who are deciding investments around the world.”
If an investor in Dubai, for example, wants to invest in Argentina’s financial sector, she says, an index “shortens the search” to find opportunities.
Beyond the sector indices, BYMA plans to create one for companies with good corporate practices, building on a panel, or a portfolio, of three such companies which announced in December their intent to operate in a socially and environmentally friendly manner: BYMA and the energy firms Pampa Energía and YPF.
Lorena Sánchez, YPF’s manager of corporate governance, said the panel is helping it attract a growing number of “responsible investors,” or those who favor shares not only for the financial return but also for their environmental and social initiatives.
Indices are also “an easy way to capture interest from passive investors,” who handle about half of the global savings going into capital markets, Berney says. “If you add a company to an index, passive investment money will automatically go into that company.”
Still, to attract a larger flow of financial investment, the country must first get through this year’s presidential election and emerge from a recession now an its second year.
When this happens, Ricardo Cavanagh, CEO of broker Itaú Valores, says he expects a rebound. For example, Latin America investment funds will want to increase their holdings in Argentina, the region’s third-largest economy, to diversify portfolios now 80% focused on Brazil and Mexico, the region’s biggest economies.
In the meantime, Berney says he is talking to more companies about listing, adding that interest has been building since last year when the government lifted a requirement that required public company boards to include a local regulator with full veto powers. The move, he says, reduces concerns of political interference.
New listings could come from the country’s biggest technology companies, beginning with those that are listed in New York, such as e-commerce giant MercadoLibre, software maker Globant and online travel agency Despegar, which went public in New York in 2017. If they move some of their shares to Buenos Aires, Berney says this would encourage other Argentine tech companies to list locally so they can get on the same index, improving their exposure to global investors.
For its part, the government has introduced retirement savings plans and tax incentives to encourage investing in pesos in the local markets. To buy and sell shares locally, investors don’t pay a capital gains tax, but face a 15% tax if they trade American depository receipts, or ADRs, of Argentine companies listed abroad.
“That is a very strong incentive that over time should attract more money,” Berney says.
Nevertheless, Norberto Sosa, director of Invertir en Bolsa (IEB), another broker in Buenos Aires, says more must be done to build the stock market.
Although the country’s many markets were consolidated into four in 2012, including BYMA for equities and others for bonds, commodities and the fixed income products of small and medium-sized companies, the markets share no interconnection, Sosa says. This means a broker has to have four systems to trade and a big back office for post-trade processing.
“It is crazily inefficient, and this means that you can’t lower commissions because you have so many people in the back office,” he says.
But the biggest hurdle is to revive Argentina’s economy, including reeling in the 50%-plus inflation rate and stabilizing the peso, says Paula Premrou, president and CEO of Portfolio Personal Inversiones, another broker.
“For the market to grow in terms of savings in pesos, people have to be doing well,” she says.
Further, education is needed to address a widespread lack of knowledge about how to invest so more people start to explore the capital markets. Popular investing is a key to boosting liquidity and reducing volatility, says Santiago Polak, a financial advisor at Balanz Capital.
“There is a lot of volatility because the volume of trades is very low,” he says. “We need more listed companies. When the markets are bigger with higher trading volumes, the volatility is a lot less, and this gives investors more peace of mind.”
Berney hopes that the efforts of the government and the BYMA will move Argentina toward a listed companies market capitalization of 40% of GDP in five years, a decade at the most. If the next government “doesn’t change course,” this could accelerate the growth of the stock market by easing concerns of further volatility, he says.
In the meantime, Berney plans to continue to create new products. “At some point, people will start buying again,” he says, “So we need to be ready.”