Don't Cry for Argentina. The Worst May Be Over

Since defaulting on a record $95 billion of its debt in 2001, Argentina has been treated as a pariah state by the global capital markets. The husband-wife presidential tandem of Néstor Kirchner and Cristina Fernández de Kirchner have been criticized for nationalizing $30 billion in private pensions and raiding Argentina's central bank for $6.6 billion in reserves. Corruption and cronyism abound, as does harassment of businesses. Last year, Argentina got booted from the benchmark MSCI Emerging Markets index. A local stockbroker confesses that his country has a penchant for self-destruction—a record that he believes will continue.

Fair enough. It pays to forgive when investing in Latin America, however. In 2001, Colombia was nearly a failed state until staging a comeback that saw its stock market surge more than fifteenfold. In 1999, Brazil could not service its debt; today it's the region's juggernaut economy. Now Argentina is getting a second look by investors, who have bid up the Merval stock index by 163 percent since its credit-crisis low in November 2008. (The index is off 7 percent in 2010.)

Optimists see three bullish trends. For starters, the Kirchners fared poorly in last year's midterm election. (Cristina is currently president. Néstor ran the country from 2003 to 2007.) They are now trying to raise cash and mend fences ahead of the 2011 presidential election.

Argentina is also bidding to reenter the global debt markets, a precondition to increased foreign direct and portfolio investment. Another plus: With the global economy recovering and both China and Brazil white-hot, the export outlook for the country's cornucopia of agricultural goods is improved. Much of Argentina's 1.07 million square miles are fertile and within reach of ports on its long Atlantic seaboard. Meanwhile, the country's publicly traded banks, attractively valued compared with lenders in neighboring countries, are an investment opportunity.

Then there are the reopened negotiations between Buenos Aires and foreign creditors over an $18.3 billion debt swap—unfinished business from Argentina's 2001 debt default and subsequent battle with bondholders. A successful deal would allow Argentina to tap the liquidity and preferable rates of the sovereign debt market, says John Price, a Latin America expert with Kroll, Marsh & McLennan's risk consultancy. That would in turn attract big overseas institutional investors and companies. Standard & Poor's (MHP) believes Argentine companies will issue $1 billion of bonds in the months following the swap. "The restructuring will be the catalyst to concentrate less on the hostile rhetoric and more on Argentina's exports and stock market," says Walter Molano, head of research at BCP Securities, an emerging-markets-focused bank.

Contrary to their old form, the Kirchners are now keen to see a deal happen. The unpopular government needs cash to mollify the restive masses and beat back the opposition. Already opposition legislators are fighting to wrest discretionary earmarking powers from President Fernández de Kirchner. Meanwhile, Argentina is once again fulfilling its role as a breadbasket (54 percent of its export income is agricultural). According to the Economist Intelligence Unit, gross agricultural production is slated to grow 15 percent this year, driven by buoyant demand for soybeans, grains, and beef.

For investors with cast-iron stomachs, there are opportunities to be had in the financial sector. Santiago Maggi, chief investment officer at Bulltick Capital Markets, an investment bank that specializes in Latin America, notes that Argentina's entire publicly traded bank industry, including Banco Macro, Grupo Galicia, and BBVA Banco Francés (BFR), can be had for some $5 billion—a figure that wouldn't buy you any of the major banks in smaller economies like Peru, Colombia, and Chile. The upshot, predicts Maggi, is that those who invest in listed Argentinian banks could make three to five times their money in the next three to five years. "Argentina," he says, "is the least crowded trade in the world." By the time most American fund managers come around to appreciating this, he warns, it will be too late.

The bottom line: If Argentine voters oust the Peronists next year, a more investor-friendly regime could be ushered in.

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