Argentine GDP Warrants Rise and JPMorgan Says ‘Buy’

The government made a warrant payment of 3.11 cents
Argentina's president Cristina Fernandez de Kirchner. Photographer: Ron Sachs/Pool via Bloomberg

Argentine government securities linked to the nation’s economic growth have become a “buy” to JPMorgan Chase & Co. and RBC Capital Markets even after a two-month rally drove their value up to the highest since November.

The warrants, which pay holders when the expansion exceeds government projections, jumped to 9.45 U.S. cents at 4:45 p.m. New York time from 6.8 cents at the end of May after the statistics institute said growth quickened to its fastest pace in six quarters in the January-through-March period. This month, JPMorgan raised its 2010 expansion forecast to 8.5 percent, which would be the most since 2007, as commodity exports and government spending rise.

The warrants are “going to keep appreciating,” said Vladimir Werning, an economist with JPMorgan in New York. He began recommending them to investors last month. They’re “a long-term buy,” he said.

The securities may return almost 50 percent by December 2011, when they’re next eligible to pay out, based on estimates by JPMorgan and Bulltick Capital Markets. The warrants are the “best investment story” in all of emerging markets and could rise to 12 cents after Argentine benchmark dollar bond yields fell to a three-month low of 10.54 percent following the government’s restructuring of $12.9 billion of defaulted debt, said Alberto Bernal, head of fixed-income research at Bulltick.

Nick Chamie, global head of emerging markets research at RBC Capital Markets in Toronto, predicts the warrants may rise to as high as 11.5 cents this year.

‘Weird Asset’

Annual payments on the securities are triggered when growth is above 3 percent and the inflation-adjusted value of the country’s GDP surpasses the government’s base-case scenario laid out in the warrant contracts.

Argentina attached the warrants to bonds it gave creditors in a 2005 restructuring of $95 billion of defaulted debt. Within months, the warrants, which mature in 2035, started trading separately. President Cristina Fernandez de Kirchner issued more of the securities in the settlement last month with creditors who rejected the 2005 offering.

“It’s a weird asset,” said Bernal. “It’s not necessarily a bond, but close to it.”

Warrant holders will receive no payment this year because the economy expanded 0.9 percent in 2009 as the global recession crimped demand for the country’s soybean, wheat and corn exports. Argentine overseas sales fell 20 percent last year to $55.7 billion before rebounding 11 percent in the first quarter, according to the statistics institute.

Gas Shortages

The government made a warrant payment of 3.11 cents on Dec. 15 after South America’s second-biggest economy grew 6.8 percent in 2008. Werning predicts a payout of 4.32 cents in 2011. Bernal forecasts payments of 4.5 cents next year and 6.5 cents in 2012.

“The bottom line is that in the next two payments, you already recover all of your initial investment,” Bernal said.

RBS Securities Inc. recommends investors wait for a decline in the warrants before purchasing them. While predicting the securities will climb to 13 cents over the next year, RBS said they may slide in coming months after the recent surge.

“There will be another opportunity to buy on weakness,” Siobhan Morden, head of Latin America strategy at RBS in Stamford, Connecticut, wrote in a July 23 report. “It will not likely be a linear trajectory” higher, she said.

Gas shortages sparked by a record cold winter may curb growth, said Neil Shearing, senior emerging markets economist at Capital Economics Ltd in London.

‘Hard Landing’

Dow Chemical Co., the world’s second-largest chemical maker, closed one of its ethylene plants and has another working at minimum capacity because of the shortages, Soledad Echague, the Midland, Michigan-based company’s public affairs director in Argentina, said in a July 19 phone interview from Buenos Aires.

Argentina may face a “very hard landing,” Shearing said in a telephone interview. He forecasts growth of 4 percent this year and 1.5 percent in 2011.

The extra yield investors demand to hold Argentine dollar bonds instead of U.S. Treasuries fell 36 basis points to 682, according to JPMorgan’s EMBI+ index. The spread has dropped three straight weeks, the longest streak since March.

The cost of protecting Argentine debt against non-payment for five years with credit-default swaps fell 75 basis points last week to 845, according to data compiled by CMA DataVision. Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a government or company fail to adhere to its debt agreements.

Record Sales

The peso fell 0.1 percent to 3.9326 per dollar, extending its loss this year to 3.4 percent.

Economy Minister Amado Boudou said July 15 that growth will be “at least” 6 percent this year, up from an earlier estimate of 5 percent. The government boosted spending 32 percent in the first half of the year to 180.4 billion pesos, according to the Economy Ministry.

Argentina’s economic activity gauge, a proxy for gross domestic product, jumped 12.4 percent in May from a year earlier, the government said July 16. The increase topped the median 9.1 percent estimate in a Bloomberg survey of economists and is the biggest since March 2004. Vehicle sales climbed to a record 61,000 units in June, the Auto Manufacturing Association said July 6.

“Growth forecasts in Argentina look quite strong,” said RBC’s Chamie, who predicts an expansion of as much as 7 percent this year. “That’s helping the fundamental value” of the warrants, he said.

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