SAN MATEO, Calif. March 28 (IFR) - At least one large fund manager is not buying into Argentina’s turnaround story and believes the country’s first international bond in over 15 years may not offer as much value as local debt in Mexico and Brazil.
In an interview with IFR, Franklin Templeton’s Michael Hasenstab, known for making large bets in out-of-favor sovereigns like Hungary and Ukraine, said the risk the government may fall short on its ambitious plan made the Argentina story less attractive.
In coming weeks, Argentina is expected to start taking orders on a blockbuster bond worth US$12bn or more, which would allow the country to settle a decade-long dispute with holdout creditors and cure its 2014 default.
The move to regain international debt market access comes amid optimism about the country’s outlook after newly elected President Mauricio Macri moved to address economic imbalances by depreciating the exchange rate, normalizing relations with creditors and lifting utility tariffs.
Large funds like Templeton, many of which have stayed out of Argentina’s non-performing bonds over the past year and a half, are expected to provide strong demand for the multi-billion deal, which will lift the country’s weight in global indices.
Assuming a US$12bn new issue, the country’s weight is expected to increase from 2.58% to 3.25% on the EMBI Global Diversified and from 1.71% to 3.25% on the EMBI Global, according to a JP Morgan report in February.
Argentina - whose component on the EMBI Global Diversified returned over 26% in 2015, the second best performing credit behind Ukraine - is attracting accounts looking to buy into an economy on the mend.
But Hasenstab, the chief investment officer of Templeton Global Macro, is not rushing to buy.
“We have been out (of Argentina) for quite some time and even though we see probably some positive changes, we don’t really see any value there,” he told IFR.
“We are a little bit more in a ‘show-me’ phase and because valuations are not particularly cheap we are spending a lot more time on other countries.”
Hasenstab prefers to focus on higher rated Mexico and Brazil, where he sees attractive opportunities in local currency debt.
“Mexico is one of the most mispriced assets out there,” said Hasenstab, who praised the country’s reform push in the oil, education and utility sectors and the central bank’s response to selling pressure on the peso.
“The central bank has handled the speculative attacks adeptly,” said Hasenstab.
“They waited for the market to get incredibly oversold ... then they came in. It was brilliantly orchestrated.”
The Mexican peso has gained over 7% since the central bank caught the market by surprise on February 17 by hiking its reference rate by 50bp to 3.75% and intervened directly in the foreign exchange market for the first time since 2009.
Hasenstab is also confident Brazil will emerge from its current political and economic crisis without a debt default.
“Brazil is in the depths of one of the worst crises arguably since the 1980s. The difference is that we can see a path out,” said Hasenstab.
“It is clear that the administration’s legitimacy of pro cyclical and overly expansive monetary and fiscal policy are over. A change is inevitable.”
Mexico’s and Brazil’s local-currency sovereign bonds are among the top holdings of the Templeton Global Bond Fund, through which Hasenstab manages some US$50bn of assets.
And while he is no stranger to making multi-billion dollar bets on nations on the brink of default and has played a prominent role in Ukraine’s debt restructuring, Hasenstab is taking no chances in Venezuela.
“We have invested in distressed debt and have gone through some tough restructurings, but I still don’t feel comfortable enough to step into Venezuela,” said Hasenstab.
Fears of a default in the country - the highest yielding sovereign in emerging markets - have been rising over the past couple of years after a 60% fall in oil prices eroded a vital source of dollar revenue for the government.
The country has so far been able to meet all of its debt payments, but investors are still pricing in a 68% probability of default over the next year as funding options narrow.
“In Ukraine we could see a path forward for the country. They just needed some financial engineering to get though a liquidity crunch,” said Hasenstab.
“Venezuela is about solvency.” (Reporting by Davide Scigliuzzo; Editing by Paul Kilby and Shankar Ramakrishnan)