Argentine Banks, the Sequel

Back in October I posted this about Argentine banks, arguing it was a good risk/reward point of entry on the long side, and that appreciation and/or stabilization of the currency was the likely catalyst.

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Today, the chart patterns suggest we are at a good risk/reward point to add to these positions if you don’t already have a full one, or to put a position on if you missed the last window.

Argentine banks are not for the faint of heart. The stocks are fairly illiquid in any meaningful size, and the macro backdrop there, while improved–and supported by an IMF stabilization program–is still fluid and fraught with risks. Moverover, there are general elections (for the presidency, congress, and the governorships of many provinces) coming up in October, and there will for sure be populist, anti-IMF posing posing in the run up to it.

But using chart patterns to identify good risk/reward points and manage downside risk brings with it courage, and here the asymmetries are good-to-excellent. Argentina poorly managed its monetary policy and currency and had a very hard fall. You can see this very clearly in the long-term chart of the four banks included in the October post (BMA, BFR, GGAL, SUPV).

Historically, Argentina finds a way to crawl back from its blowups. Without getting into the weeds, the pattern has been that the country acts less responsibly when times are flush, and more responsibly when its back’s up against the wall. It could be that this time things turn out differently, but that wouldn’t be the high probability bet.

Technically, the patterns, in the main, show higher highs and higher lows, which also improve the odds on the long side.

So, what about the downside?

For the one year charts below, you can see the banks have had a meaningful downdraft/pullback that hasn’t violated that overall pattern of higher highs and higher lows.

This simple approach here would be to put a stop on any buys here (or perhaps on the entire position–depending on how you need to manage your risk) somewhere at ot below these recent local lows. IMHO, given the illiquidity, stops should be done on a closing basis, and probably based on more than one close below the level chosen. Obviously, the “slower” the closing trigger, the greater the scope for exit slippage, and this needs to be reflected in position sizing.

One final point: the currency. The Argentine peso didn’t have the scope for appreciation in its starting point compared to typical macro blow ups, so don’t be too concerned if it doesn’t strengthen significantly. It does however, at a minimum, need to broadly stable. Even slow depreciation is fine. But a surge in local demand for dollars–above and beyond and seasonal and transitory factors (and seasonal factors are large in Argentina)–means they are losing control of the macro framework. And this would show up quite quickly in the bank stocks.

Good luck.

Emerging Market Currencies: Size it Right, Sit Tight

We are probably still in the sweet spot for the emerging market cycle. This doesn’t exempt us from the risk of corrections. It doesn’t eliminate geopolitical flare ups, trade war rhetoric, or the macro scare du jour. And it doesn’t make September/October calendar effects any less scary. But it does mean if you are an investor the wise choice is to stay in, stay the course.

(Pro memoria: the dominant error in professional investing is over-forecasting corrections and then chasing bull markets from a position of weakness.)

I’ve given the reasoning for this view herehere, and here.

And my broader views on central banks and currency markets are laid out  here.

Basically, it all boils down to:

  1. At this point in the global risk cycle the US looks mature and investors go abroad
  2. The Fed is closer to its terminal policy rate than expected; other CBs are at the front end of their normalization processes
  3. Investors desperately need yield, and emerging market currencies have it
  4. Country differentiation is less important than asset allocation

And demand is strong. I continue to hear of managers wanting to get into the space and/or increase their allocation, while, as PIMCO points out, local markets deepen.

Technically, the picture is strong. USDTRY and USDCLP have already broken down. It is likely that currency pairs like USDMXN, USDBRL and USDINR are to follow. Here are the charts: