Does history repeat itself? Can we avoid the need to practise forgiveness in investing?

We are probably familiar with forgiveness in a religious sense, but what place does it have in investing?

In 2016, Argentina returned to the international capital markets (after defaulting on US$95 billion of debt in 2001).

The total size of the bond issue was originally planned to be US$15 billion (and was eventually upsized to US$16.5 billion). However, demand for the bonds neared US$70 billion. The bonds even rallied after their initial debut.

Why was Argentina’s bond issue so successful despite high inflation, an overvalued currency and meagre economic growth?

Investor sentiment had shifted (positively) as a result of a change in political leadership. President Mauricio Macri had just taken office with a commitment to generate growth and stability.

Yet, a scant two years later, Argentina is facing a currency and liquidity crisis. The currency has lost more than half its value since the start of 2018 (as at August 30), the central bank has raised local interest rates to 60 per cent and inflation is currently over 30 per cent (on top of 39 per cent recorded in 2017).

To make matters worse, Argentina is experiencing a massive drought which ruined its biggest export, soy.

It’s important to note that Argentina is not currently in default on its debt. Some large US firms are even buyers of short-term Argentinian debt and some Argentina bond prices have risen since the onset of the crisis.

At a recent forum, held by Sterling, many chuckles were heard in the audience when a very astute investor mentioned that Argentina had a 100-year history of defaults and economic turmoil.

While most people were only familiar with the 2001 incident, the reality is that the country has defaulted on its sovereign debt eight times since its independence from Spain in 1816.

What about Barbados?

Look at trends.

Did you remember that Barbados used to be an investment grade credit? In 2003, Barbados was rated A. For context, the United States is currently rated AA+ by S&P 500. So, you can imagine how significant it was for a small Caribbean country to have such a fantastic rating.

Credit ratings work like grades in school, A to BBB is good, BB and below is not good, C and below is weak (high risk). The credit ratings follow the same pattern.

In 2004 Barbados was rated BBB+, which is still investment grade. However, by 2012, the country was no longer investment grade, and was rated BB+. By 2014, the rating further deteriorated to “B”. By 2017, it was CCC+, and currently it is at “SD” which is selective default.

If this was the pattern of your child’s report card, would you not have started to ask questions about why the grades were falling so far down? Especially, since your child used to be among the brightest in the class?

In short, it is very important to look at the history of the credit and the economic data coming out of the country.

The writing was on the wall for Barbados, as we pointed out in the Sterling Report of March 2017.

Similarly for Argentina, the country had inflation of 39 per cent in 2017 but its currency only depreciated by five per cent during that year. The laws of economics mandated a significant adjustment of the currency.

 

Yanique Leiba-Ebanks, CFA, FRM is the AVP, Pensions & Portfolio Investments at Sterling Asset Management. Sterling provides financial advice and instruments in US dollars and other hard currencies to the corporate, individual and institutional investor. Visit our website at www.sterling.com.jm Feedback: If you wish to have Sterling address your investment questions in upcoming articles, e-mail us at: info@sterlingasset.net.jm

 

 

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