Views From the Floor

In this weekly publication, we talk about Argentina’s sovereign debt, Turkey, and what we believe are the two extremes in today’s markets.

Keeping an Eye on Argentina’s Sovereign Debt

About two-thirds of Argentina’s sovereign debt is in USD, according to Bloomberg (Figure 1). This means that when the Argentinian peso weakens (which it has done so by about 52% against the USD in the first eight months of the year), it makes dollar-debt repayment a lot more expensive.

Indeed, Argentina’s reserve coverage (calculated as foreign-exchange holdings divided by 12-month funding needs for the current account, short-term debt maturities and amortization of long-term debt) stood at 0.6, according to a Bloomberg News article published on September 3.1 This means that Argentina wouldn’t be able to cover their debt repayment needs without new borrowing.

Figure 1. The Breakdown of Argentinian Total Debt (%)

As of 10.09.2018

Argentina and Turkey: Same, Same, But Different

Argentina and Turkey are facing similar challenges: Both the currencies lost about a quarter of their value against the USD in August. Both countries have stubbornly high inflation. Both countries have twin deficits (combined budget and current-account gaps as a percentage of GDP) of 8.7% and 10.4%, respectively, that require financing, according to a Bloomberg News article published on September 3.1 As mentioned earlier, Argentina’s reserve coverage is estimated to be 0.6; Turkey’s at 0.4.

However, Argentina’s approach to its crisis couldn’t be more different than Turkey’s: Argentina’s President Mauricio Macri noted that markets had expressed a lack of confidence in the peso, while Turkey’s President Recep Tayyip Erdogan sees the lack of confidence in markets as an economic war; Argentina has hiked rates aggressively (it raised rates by 15% to 60% on August 30), while Erdogan is hostile to high interest rates, claiming they made “the rich richer and the poor poorer”; Argentina has asked the International Monetary Fund (IMF) for help, while Turkey has relied on allies such as Qatar rather than going to IMF.

Despite the differences in the way the countries are tackling the issues, neither approach appears to be working!

Figure 2. The Worst EM FX Moves in August 2018

Between 31.07.2018 and 31.08.2018

The Two Extremes in Today’s Markets

We believe there are two extremes in today’s financial markets.

The first is the valuation gap between growth and value stocks. There are parallels between today and just before the technology bubble burst in 2000. While the US has the FAANG stocks, Europe has payment processers that are trading on very high valuations: According to Bloomberg, a Dutch e-commerce company is trading on a 12-month forward price-to-earnings (P/E) ratio of 110.8 times, a German internet company is on 47.6 times earnings and a French online services company is trading on 33.6 times earnings.

The second extreme is the gap between equity and bond yields. The gap between European dividend yields and European bond yields is close to all-time highs and has indeed only been higher 1.6% of the time over the last 95 years, according to Morgan Stanley.2

So where does the opportunity lie? We believe there are a lot of stock-picking opportunities in the banking and insurance sectors. Banks and insurance companies have generally underperformed because, in our view, banks can’t make money in this low interest-rate environment, while we believe insurers are struggling because of their low investment income given that regulatory requirements force them to buy low-yielding bonds instead of high-yielding equities of the same issuer. However, lowly-rated financials paying solid dividends appear to be attractive in our view.

Figure 3. Value vs. Growth Is at the Lowest in At Least 15 Years in Europe and US

Source: MSCI, Morgan Stanley Research; as of 15.08.2018.

Figure 4. The Gap Between European Equity and Bond Yields

Source: MSCI, Global Financial Data, Datastream, Morgan Stanley Research; as of 15.08.2018.

Uranium Prices Finally Start to Creep Up

Uranium prices are finally starting to creep up after several years of declines.

The price of the radioactive material is up by about 30% since April. Production cuts, cancelled projects and interest from financial investors has helped drive up the price, according to the Financial Times.3

Secondly, we believe the demand of uranium will rise as the world builds more nuclear reactors: In more than 12 countries: 71 nuclear reactors are under construction, 165 planned and 315 proposed.4

With regards to production cuts, we would point out that the largest uranium mining company in the world, with 20% of global production, announced in 2017 that it would cut planned production by 20% in 2018, 2019 and 2020.3 Furthermore, the FT reported that the company sold a large chunk of its annual output to a London-listed investment vehicle that is planning to buy and store a large amount of the metal in anticipation of higher prices.3

Figure 5. The Rise and Fall of Uranium

As of 07.09.2018

With contribution from: Nick Granger (Man AHL, CIO), Giuliana Bordigoni (Man AHL, Head of Alternative Markets), Firmino Morgado (Man GLG, Portfolio Manager) and Filipe Bergana (Man GLG Portfolio Manager).

1 We May Be Facing a Textbook Emerging-Market Crisis: Satyajit Das, September 3, 2018
2 Morgan Stanley; European Equity Strategy; 3 reasons to buy stocks with High & Secure Dividend Yields; August 15, 2018
4Blue Sky Uranium presentation, June 2018;