(BFM Bourse) – Since January 1, the flagship index of the Buenos Aires market, the Merval, has won 99%. But far from benefiting from a robust Argentine economic situation, this increase is explained by the high inflation experienced by the country and the plunge of the Argentine peso. Moreover, the Istanbul Stock Exchange is experiencing an even more pronounced progression.
Argentina has waited more than 36 years to celebrate such a moment of popular jubilation. Led by its star player, Leo Messi, the “Albiceleste” won the Football World Cup, after an epic match against the France team.
If these victories in major sports competitions can positively (and temporarily) influence the morale of households, the economic repercussions are likely to remain infinitesimal in view of the difficulties encountered by Argentina.
“Winning football’s supreme accolade, the first for Argentina in 36 years, provided a much-needed distraction from the misery of daily life.” Bloomberg.
Much better than the CAC 40 but…
Yet the Buenos Aires Stock Exchange presents a performance, which on paper, turns out to be incredible. Since January 1, the Merval, which includes twenty values corresponding to large companies, won 99%, against a drop of 9.2% for our national CAC 40. This index largely includes companies from the energy, raw materials (or raw materials processing) and financial sectors.
But if, facially, this bewildering rise may suggest that the Buenos Aires Stock Exchange could claim the title of 2022 world champion in the equity markets, the explanations tend to greatly qualify this performance. First of all, Buenos Aires is overtaken by the Istanbul Stock Exchange, which has recorded an increase of almost 190% since the start of the year.
Above all, the jump in the Merval is explained by macroeconomic imbalances. Inflation in Argentina is indeed reaching dizzying figures. In November, it registered at 92.4% over one year and is expected at 100% for the month of December, underlines Bloomberg. As a result, the value of the currency plummets. The US dollar has jumped nearly 70% against the Argentine peso since January 1.
Mechanically, the large Argentine companies whose quotations are denominated in pesos, are worth “more” in local currency because the value of their assets has not intrinsically changed and their income earned abroad, in dollars, increases. due to the fall of the Argentinian currency. “It is a simple value effect, mechanical, with regard to the intrinsic value of companies listed on the market”, summarizes John Plassard, investment advisor at Mirabaud. The specialist underlines that this effect is also observed in Turkey, where inflation reached a similar level (more than 84% over one year in November).
By restating the fall of the Argentinian peso against the dollar, of approximately 40% over the year and relying on the government’s official exchange rate, the increase would be closer to 20%, according to our calculations.
Hedging instrument
To the point that equity markets are becoming a hedging instrument for local investors against the rapid depreciation of their domestic currency.
“It’s a hedge against exchange rate risk. Clearly, many companies have assets abroad that are revalued or exports that have increased, while others have debt in dollars, which caused them to do less well than others [valeurs, NDLR]“, develops Gustavo Neffa, of Research for traders, quoted by Bloomberg Linea. “In any case, we have an equity market which makes it possible to hedge against the risk of devaluation”, he insists.
Remember that Argentina is experiencing the worst difficulties in maintaining sufficient foreign exchange reserves in dollars. Argentina tries as much as possible to restrict the access of its population to the greenback through numerous restrictions. Because given the low value of the Argentine peso, many households are trying to save in American currency. This has generated a multiplication of exchange rates, especially on the black market. To the point that the government has tried to regain control by launching exchange rates that apply to certain sectors of the economy such as the “Soy” dollar. The country recently launched a “Coldplay” Dollar, applicable to entry tickets to international shows.
Julien Marion – ©2022 BFM Bourse