Views From the Floor

Can the Hand of Lacunza stem the tide in Argentina?; and 10 years of Growth and Value in Europe.

The Hand of Lacunza

Argentina’s finance minister, Hernan Lacunza, announced four measures on 28 August in an effort to stem a crisis of confidence. These were to:

  1. Extend the maturity of short-term Treasury bills denominated in Argentine pesos and US dollars between three and six months for institutional investors (not for individuals). Institutional investors account for 10% of the holders of the debt although likely for the bulk of the notional;
  2. Send a bill to Congress to request the approval of an extension in the maturities of longer-term debt under Argentine law;
  3. Begin a process of negotiation to extend maturities in foreign-denominated debt without haircuts of principal or interest. This will require for a bill to be approved in Congress with the new terms of the bonds to be offered in exchange if foreign investors agreed to it;
  4. Begin a renegotiation of the maturities with the IMF.

 

The measures were triggered by a drop in the rollover ratio for Argentina T-bills from approximately 73% of the maturities issued up until the primary election that took place in early August, to just 10% in the auction that took place on August 29.

Based on Lacunza’s comments, we believe that the objective of the first measure is to free the central bank to use its reserves to stabilise the foreign-exchange market, while the short-term maturities are pushed forward in order to give the IMF and the opposition some comfort that the reserves are not going to be used to finance the outflow of capital from these T-bill maturities.

In our view, measures 2, 3, and 4 – which focus mainly on maturities up to 2023 (the end of the presidential period scheduled to begin in late December) – are being undertaken to allow the new government more margin of manoeuver free from large short-term maturities.

We believe this is likely to drive rating agencies to downgrade Argentina further, which would be very negative for T-bills, but less negative for the medium- and long-term debt that had already fallen to price a restructuring of the bonds. The Argentine peso should be better supported, in our view, given that the first measure will decrease the pressure on reserves derived from the maturities of short-term T-bills.

Ten Years: A Retrospective on Growth and Value in Europe

Growth has been the dominant equity investment factor of the last 10 years. But which region do you associate with growth companies? At a guess, we would say that your first thought leaped to the US: the home of Google, Amazon and Facebook.

In contrast, Europe would not be at the top of most people’s lists. However, similar to the US, Growth has also outperformed Value in Europe in the last 10 years (Figure 1). What is striking is that the relative performance of Growth versus Value in the two regions is nearly identical (differing by only 0.1%, Figure 2).

Figure 1. Cumulative Returns of Growth and Value in Europe

Cumulative Returns of Growth and Value in Europe

Source: MSCI, Man Numeric; as of June 2019.

Figure 2. Annualised Returns, US and Europe

Annualised Returns, US and Europe

Source: MSCI, Man Numeric; as of June 2019.

With contribution from: Guillermo Osses (Man GLG, Portfolio Manager) and Greg Bunimovich (Man Numeric, Senior Portfolio Manager).