Paradox: A downgrade to the country stimulates investments in shares of Argentine companies

This Tuesday it is defined whether the country is kept as emerging or is reduced to a border country. And since the funds plan to allocate percentages of their portfolios to countries in that condition, there would be a greater investment flow.

The interest of local investors will be put this week on the news that arises from the annual meeting of Morgan Stanley Capital International (MSCI), which on Tuesday will have to define whether to keep the country in the category of emerging markets or downgrade it to the frontier market. This, although a priori seems bad news, could draw more flow to local companies and is one of the factors that drove the rally of Argentine papers in recent weeks.

Although the meeting is scheduled for this Tuesday, the results will be known only this Thursday and will be made official on the 24th of this month. However, the confirmation of the downward revision of the Argentine situation may be a catalyst that extends the rise in share prices, according to analysts.

MSCI builds the indices in which most international funds invest. The index selects a pool of stocks and the funds replicate the composition to begin investing. When a reclassification occurs, the flow of buyers who can start investing in the country increases.

The market's bet is that, precisely, Argentina will be reduced to a border market, a category in which economies such as Kenya, Morocco, Nigeria, Romania, and Vietnam, among others, appear at this time.

In its last annual review, exactly twelve months ago, the agency had decided to "give another chance" to the country and keep it as an emerging market. But he had warned that capital controls could force a downward revision. And, far from correcting it in the last year, in October, the Central Bank deepened the exchange rate hold.

"We believe that there is a high chance that the country will return to the Border Market because it has not improved in terms of capital controls and limitations for the remittance of dividends abroad," said Gustavo Neffa, from Research For Traders. The return to the frontier market, a category that the country only abandoned in 2019, would serve to improve the outlook for Argentine assets, which should not "compete" with other countries with better projections. "If Argentina goes to Border Markets, it would become the only country in the region to fall into this category. And only Brazil, Chile, Colombia, Mexico, and Peru would be listed as emerging," added Neffa.

It's all about perspective. With this possible recategorization, Argentina would go from being "the last ear in the jar" of the emerging countries, where there are important countries such as China, India, South Korea, Malaysia, Taiwan, Thailand, Poland, Russia, the United Arab Emirates, and South Africa; to better have a better position within the index of border economies.

"Currently, Argentina has a weighting of 0.12% in emerging markets. In case of becoming a frontier, the participation would rise to 11% within the new group under the assumption that the current market capitalization of the Argentine index and of the other economies with this status. In this way, we would position ourselves behind Vietnam and Morocco as the third country with the highest incidence in the index ", explained Nery Persichini, from GMA Capital.

Argentina's return to emerging markets had greatly excited investors in 2018. At that time, it was speculated that US $ 4 billion would enter the country as a result of the recategorization. However, the collapse of almost 60% of local stocks after PASO in 2019, caused many local papers to abandon the Argentine index due to the fall in prices, and the momentum faded.

But the return to the border could mean that many bank and energy stocks are once again integrated into the Argentine index. These sectors led the rebounds of the actions of the last weeks: only in the first four wheels of the month the Argentine papers that are listed on Wall Street jumped up to almost 24%.