Can Frontier Markets replicate the success of Emerging markets within your portfolio? A focus on Argentina
Emerging markets have always been a good source of alpha, but as they become easier to access, the returns are starting to dwindle. So where to next? Do the frontier markets hold the key? Can hedge fund managers replicate the kind of returns the emerging markets used to give them by investing in frontier markets instead? And if so which ones offer the most potential?
Federico Carballo, Partner at Copernico (Brazil), discussed the possibilities in Argentina at last year’s Hedge Funds World Latam conference. He believes the region can offer hedge fund managers massive opportunities for alpha returns, if only the unstable political situation can be resolved.
Why does he think Argentina provides an attractive investment opportunity over next couple of years?
- It is the 2nd largest economy in South America and a member of the G-20
- It has a population of 40mn with high literacy rates, long life expectancy and is substantially middle class – GDP/ Capita of ~$10k
- It has a solid external position, low levels of debt, and a manageable fiscal position
- The underperformance of Argentine financial assets relates mainly to political risk, so if this can be resolved many opportunities will open up
- A number of catalysts for re-pricing exist:
− End to election driven policies (presidential elections).
− Inherited reality, and the need to access international markets will drive next administration policies triggering a sharp recovery in asset prices.
− Re-assessment of Argentine risk vs. developed world.
− Low developed world rates will drive global hunt for yield.
Take a look at Federico’s analysis of the regions macroeconomic performance, debt levels, political outlook and equity and currency markets and see what you think?
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