Wall Street skips Argentina bond and M&A rally loved by locals

Wall Street investors aren’t tempted by the best performing bonds in emerging markets this year even as local portfolio managers are piling in.

Argentine government bonds are up 151 percent since Javier Milei won last year’s presidential election, but the foreign share of holdings is down, according to data compiled by Bloomberg and the INDEC national statistics bureau. What’s more, foreign direct investment through September averaged just US$72 million a month, and for the first time in four years, there are more local than overseas investments. 

Despite Milei’s so-called “shock therapy” economics that include slashing deficits and inflation, foreign investors have largely remained on the sidelines. In fact, some multinationals have decided to leave the country altogether, selling their assets to local businesses.

It’s a much more tepid approach compared to former president Mauricio Macri’s first year in office, whose pro-business agenda caused a surge of hot money. After Argentina’s sovereign default in 2020, what separates domestic investors from those from overseas these days is that Milei hasn’t lifted the capital and currency controls he inherited, effectively shutting out foreign money.

Investor optimism in Buenos Aires hasn’t translated to bullishness among asset managers on Wall Street, including bond giant Pacific Investment Management Co. “It’s been painful to be a little bit underweight these bonds. There is a clear fear of missing out on the trade,” said Pramol Dhawan, who leads Pimco’s emerging markets portfolio management team globally.  “But again, I view it as a trade. There are better risk return profiles we can generate elsewhere whilst still being underweight Argentina risks that have high degrees of clarity,” Dhawan said.

The share of foreign holders of Argentina’s 2035 bond fell to 71 percent in the second quarter, down from 811 percent a year earlier, INDEC data shows. And Barclays Plc strategists last month recommended swapping Argentine bonds maturing in 2030 for similarly dated Ecuadorian bonds.

“We aren’t seeing many foreign investors in Argentine bonds,” Finance Secretary Pablo Quirno said Tuesday.

The main driver for this trend are Argentina’s currency controls, which include a tightly managed exchange rate that is on average 20 percent stronger than the market rate. And unlike in other countries, capital curbs prohibit international investors from withdrawing their money. 

At least for now, Milei is sticking to this framework, despite his pledges to free up all facets of Argentina’s economy. The president has to hold onto his political support leading up to the 2025 congressional election, access foreign funding and over time find a way to lift capital controls.

“With exchange controls, Argentina is like a closed pen for local investors”, says Marcelo García, director for the Americas at Horizon Engage, a New York-based consultancy firm. The longer the administration maintains exchange controls, the “more advantage local investors will have,” García said.

The hesitancy among foreign investors can also be seen in the realm of mergers and acquisitions. HSBC Holdings Plc, Exxon Mobil Corp and Xerox Holdings Corp, among other international companies, this year sold their assets to local investors, including Grupo Financiero Galicia, PlusPetrol and Grupo Datco, respectively.

Not surprisingly, the share of foreign investors in M&A transactions has fallen to 49 percent in the first half of 2024, the lowest level since 2020, according to PwC Argentina. And, caution around the “transition of the economy” resulted in only 37 M&A deals in the first six months of the year, totalling about US$1.12 billion, well below the average of 50 deals during comparable periods, the firm said. 

“Foreign investors see that they will not have the possibility to take their profits home and that is difficult to explain to the headquarters when they have to obtain a final investment decision,” García said.

If there’s anything that can be gleaned from the past, the removal of capital and currency controls will be crucial for international investors. More than US$10 billion entered Argentina between 2016 and 2018, before a sell-off by offshore investors caused a financial crisis.

“You see that foreign investors are starting to be encouraged and value the government’s program, but little by little,” said Alberto Ades, a director at investment advisory firm NWI Management LP. “We have to recognise that for them, Argentina has a complicated history.”