Argentine Stocks Look Ripe As Peso Devalues
Shocking events have a tendency to mark sentiment extremes.
We see it time and again across markets. Any development that forces traders and investors to instantly and substantially alter their outlooks has a tendency to create a market move several standard deviations from the norm. Markets then spend weeks, months or years recovering from the shock as more information becomes available and cooler heads prevail.
On December 17, the new political administration in Argentina lifted some currency controls. While it may have been expected, it triggered a massive revaluation of the Argentine peso.
We wouldn't pretend to be knowledgeable about the fundamental impact of the currency valuation on Argentina's economy, currency flows or political popularity. Our focus is on sentiment, and what previous devaluations have triggered.
Our friend Steve Sjuggerud recently highlighted the idea that this is likely a good thing. And, indeed, it usually has been, especially longer-term.
The chart below shows the Merval Index versus the spot value of the peso. All monthly moves of more than +5% in the ratio of the dollar to the peso are highlighted with an arrow (if the blue line is rising, then it means it takes more pesos to buy one dollar, i.e. the peso is declining in value).
Figure 2 shows the returns in the Merval index after any monthly move of more than +5% in the dollar/peso ratio. As we can see, it led to a higher value in Argentine stocks a year later every time and by an astounding margin.