Argentina · Markets
Sharp drop in Argentine stocks
Miguel Braun · Feb 12, 2025 · 7 min read
Dear all, good morning.
The massacre in Argentine stocks continues: since January 7 they have fallen close to 25% in USD. In my view this is happening because the market sees that the freeing of the FX market is not going to arrive any time soon.
On top of this, the BCRA is finding it hard to accumulate reserves, because all the USD it buys it then sells again in the MEP / CCL market to meet the zero-emission target. That is: they buy 100 USD in the market at, say, 1,100 pesos. They print those 110,000 pesos, hand them over in exchange for the USD, and then go to the market and sell USD for an amount X until they get those 110,000 pesos back. This way they re-absorb the pesos they issued but keep very few USD (the difference between the official and the MEP — the spread). On top of that, they also have to pay for imports and debt maturities, so in the end they don't accumulate many reserves.
It's incredible that there are still restrictions like the parking period, the cross-restriction that if you trade MEP or CCL you can't trade the official USD and vice versa, or the obligation to send the USD resulting from a transaction to the bank to "cleanse" them before being able to trade them again. All things the government could already be removing...
These restrictions are the reason Argentina has a very high country risk, which means the government has the international debt market practically closed... so there is no choice but to resort to the blessed IMF.
So this is how a vicious circle works: Argentina can't access the international debt markets because of all the FX restrictions it has, but at the same time it doesn't dare remove the restrictions without first having a USD injection like the one the IMF would give us, for fear the dollar will rise. It's a bit of the chicken-and-egg story, where in the end the only one who lends you money under these conditions is the IMF... and that's why we are so tied to whatever that organization decides.
You know I'm of the view that the conditions to free the FX market are already in place. How would that work?
- Exporters should no longer be obliged to liquidate their exports against USD. That is, they keep the USD they generate minus export taxes. This way the State secures USD income from exports, which lets it pay its debts and gives it a USD flow to lower its credit risk.
- Importers would buy their USD at MEP or CCL, as would companies that want to pay dividends abroad. No one will have to keep subsidizing importers, who for years have been accessing a dollar much cheaper than the rest of the population.
This way you eliminate the BCRA's intermediation in the FX market. There is no longer any need to issue pesos to buy USD, and the peso will have a fiscal anchor (surplus) and a monetary anchor (zero emission). The only thing you lose here is the third anchor, the FX one (crawling peg or controlled devaluation).
This is the argument made by those who say the conditions to lift the controls are not yet in place:
- That the dollar could spike and the government has no ammunition to contain it, because it has negative net reserves.
- That along with the dollar spike, inflation could also rise.
- That these two factors would hit politically in the midterm elections in a negative way.
They are valid arguments, but precisely the FX anchor is also an anchor on the Argentine economy, which never quite takes off or recovers because of the FX restrictions. This is also a big factor why not many investments come in.
I'm one of those who think that if you remove the FX anchor and let the dollar float, the economy should rebound strongly. You can have an overshooting in the dollar level in the short term, but in the end having a fiscal surplus and zero emission should make the dollar find its equilibrium point. This on top of the fact that Argentines have more than 280 billion USD abroad, declared!!
Argentina has a surplus of USD; we are an exporting country par excellence. We have agriculture, we have Vaca Muerta, we have mining, lithium, uranium, human capital to export services, etc. What is missing is confidence.
It's again what I say about the chicken and the egg: USD don't come in because we have FX restrictions, but we don't dare remove the FX restrictions for fear the dollar will rise!
For me, for USD to come in, the first thing to do is precisely to remove the restrictions. That would give a tremendous injection of confidence. Then with the income from export taxes in USD and access to the debt markets, you go paying all the existing debts and obligations of the National State... which, besides, could always also take on peso debt, use it to buy USD and then pay foreign-currency maturities this way. On top of continuing full speed with the chainsaw to keep cutting spending.
Enough thinking about everything politically. Milei got where he is precisely by being politically incorrect and doing and saying what he thought regardless of the consequences.
Where do we stand?
Unfortunately, I don't think any of this will happen in the short term. Milei and Caputo want to be 10,000% sure that the day they lift the controls the dollar can't rise because it has no fuel left and there are no reasons for it to happen. In the meantime this hits Argentine economic activity hard, but they want to focus on killing inflation first.
As a lifelong Milei voter, I would feel much more like voting for him in the midterms if he removed the FX restrictions than if he didn't, even if doing so generates a rebound in inflation or the dollar value. But it doesn't matter...
What is going to happen?
Yesterday Caputo, in an interview with Jonny Viale, said the agreement with the Fund will be ready in the first four months of 2025. And Milei told Laje that "it's just missing the bow on top".
Once the agreement is in place, between the liquidity the BCRA has and the funds coming in from the agreement, Milei says the Government would have a wall of 20 billion USD to control the dollar and avoid an abrupt rise.
This way, the only thing left to free the controls would be that:
- Inflation converges to the pace of the official USD — we are getting closer and closer; if we consider that wholesale inflation in December 2024 was 0.8% according to Milei, we could argue we are in deflation (subtracting from that 0.8% the inflation induced by the 1-2% crawling peg). So he could easily grab onto this and free the controls the day the agreement with the Fund is in place.
- The broad monetary base matches the monetary base. There is still some way to go on this point, but it's very positive that they have lowered the peso interest rate so much, to less than 30%. This makes the remuneration of the Treasury's liabilities lower and lower, and that increases the chances that the economy will gradually absorb the enormous excess of pesos left by the criminals Massa, Alberto Fernández and Pesce with the tremendous monetary issuance they did, which obviously put pressure on the dollar and inflation.
It's hard to put a date on the freeing of the controls, but with the IMF agreement closed, that will act as a catalyst for Argentine stocks.
On stocks and bonds:
On August 6, 2024, I remember I sent you an email after we came out of "Black Monday" where markets had fallen sharply after the Bank of Japan raised the interest rate more than expected. From those drops, Argentine stocks then rose more than 100% in USD.
The lesson this market moment leaves me again is that you have to take profits and know how to stay in cash when everything is fine and we are all making money. That's when we have to take profits.
The phrase I used back then was "a bird in the hand is worth a hundred in the bush" to refer precisely to this idea of taking profits every now and then. This time we didn't take profits because honestly I didn't feel Argentine valuations were out of control at all, but when we are many points above the index... sooner or later there is a small correction. I take the blame for not having taken profits (again) and I hope it doesn't happen to us again.
That said, in moments like these when several of you write to me worried and distressed... and I want to kill myself for not taking profits, it means we are already near the bottom. Just like after "Black Monday", once things settle a bit the stocks will bounce back strongly. Of course for that we need some driver, with the IMF agreement being a good catalyst that could come soon. Also, at the end of February and beginning of March companies start reporting their 2024 results, which should also help.
These drops in prices are already leaving new opportunities, with the AL30 yielding 13% again and the AL29 14%. That's more than 3 times what a U.S. bond yields, so at any moment country risk starts to fall again and with that comes the rise in stocks.
Right now, just like on Black Monday, I'm much more a buyer than a seller. I'm not selling anything at these prices — nothing worse than selling driven by your emotions and your bad mood. To finish, I'll leave you some phrases that always help me get through moments like these:
"To buy when others are desperately trying to sell and to sell when others are buying with too much enthusiasm is the hardest thing. But it pays the greatest rewards."
Even though the reality of the business is more or less stable, the prices Mr. Market will offer you are not. Some days it will be euphoric, see only the positive and offer a very high price. Other days it will be depressive, see only risks and offer a very low price.
"You must remember that Mr. Market is our manic-depressive partner. He offers you buy or sell prices; he doesn't tell you what things are worth. The intelligent investor is a realist who sells to optimists and buys from pessimists." That's all for today. We'll stay in touch.
Miguel
Financial Advisor · Author · Columnist