What Argentina’s Capital Flows Suggest about Valuations

Capital flows into Argentina have reversed the trend

Argentina’s capital markets (ARGT) saw a net of $869 million of funds flowing into the country’s portfolio investments in the first half of 2016. The second half of 2015 saw a net outflow of $14 million. The fund flow led to the rise in the benchmark Merval index to more than 30%, despite the depreciating Argentine peso eroding foreign income of multinationals in the economy.

What Argentina’s Capital Flows Suggest about Valuations

Big names that intend to increase their investments in Argentina

BP’s (BP) Pan American Energy has announced plans to invest $1.4 billion in the exploration and production of energy reserves in Argentina’s economy. According to the American Chamber of Commerce in Argentina, US firms could invest up to $2.3 billion over the next year and a half. These could include big names such as General Motors (GM), AES (AES), and Ford Motor (F).

Being locked out of the international capital markets, the government of Argentina has been printing money as a means of funding, thus fueling inflation in the country. However, the economy has already reentered the international bond market after 14 years, breaking the spell cast by its $95 billion default in 2001.

Earnings haven’t reversed the trend yet

From a valuation perspective and as you can see in the above graph, forward earnings for now seem to be on a declining trend. However, high interest rates, currency free float, and massive devaluation have led the markets to rise on the back of improving fund flows. From a directionally long perspective, it still remains to be seen whether Argentina will be able to sustain this surge in equity.

Next, let’s see where Chile (ECH) stands.