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What Argentina’s 48% stock market decline means for stocks like Galaxy Resources and Pilbara Minerals

Stuart Lucy

Stuart Lucy is an Investment Specialist at the Australian Stock Report, and has gained exposure to funds management and investment banking throughout his career. He draws on this experience to provide macroeconomic commentary and actionable investment insights to clients. Stuart is responsible for writing reports, is involved in delivering Macrovue webinars and provides general advice to our members on portfolio construction. Stuart currently holds RG146 General and Securities qualifications.

Argentina’s stock market sold off steeply on Monday, following the poor performance of centre-right leader Mauricio Macri in the primaries. Macri lost by 15%, much greater than the 6-7% margin most commentators were expecting, creating fears within bond markets of a national default. The country has inflation running at 30% and recorded a 30% stock market drop on Tuesday. Its currency has depreciated around 25% against the US Dollar, as investors digested a roll-back of Macri’s free-market reform agenda.

ASX lithium miners are selling off on the news, despite the backdrop of a rally in lithium more broadly. Latin America offers rich lithium deposits and the chaos in Argentina is a bellwether for the region. Galaxy Resources (ASX: GXY) declined 3.86% and Pilbara Minerals (ASX: PLS) declined 2.11% shortly after the open, as their presence within Argentina caused investors to hit the panic button.

Macri is currently using sky-high interest rates, which rose to 74% despite a recession, to control inflation. Alberto Fernández, his opponent, is in favour of using loose monetary policy to stimulate the economy and revive growth. He is also strongly opposed to a reduction in subsidies, arguing that cutting subsidies on basic goods hurt people who struggle to afford them.

What the market is most worried about however is his opposition to the country’s austerity measures and pledged to renegotiate a deal with the IMF, a move that could culminate in an Argentinian default. There is also the more sinister prospect of capital controls, yet another sign that the US-China trade war could be the start of a series of nationalistic policy changes that could bring global trade growth to a halt.

While the news in Argentina may seem a long way away for investors who don’t hold ASX equities with a presence in Latin America, share price declines in emerging markets often signal turbulence for developed markets such as ours. This is because the loss of investor confidence in the markets does not happen overnight. The bond market will signal a recession first, which has already happened. Argentina’s market selloff, combined with heavy declines in China and Hong Kong, contributes to a broader emerging market decline.

Investors should also keep in mind that measures restricting trade and financial flows were one of the main contributing factors to the severity of the great depression. As such, the current news should be monitored closely by investors, who may look to reposition their portfolio if the situation escalates.

 


 

Disclaimer:

This article has been prepared by the Australian Stock Report Pty Ltd (AFSL: 301 682. ABN: 94 106 863 978) (“ASR”). ASR is part of Amalgamated Australian Investment Group Limited (AAIG) (ABN: 81 140 208 288 Level 13, 130 Pitt Street, Sydney NSW 2000).

This article is provided for informational purpose only and does not purport to contain all matters relevant to any particular investment or financial instrument. Any market commentary in this communication is not intended to constitute “research” as defined by applicable regulations. Whilst information published on or accessed via this website is believed to be reliable, as far as permitted by law we make no representations as to its ongoing availability, accuracy or completeness. Any quotes or prices used herein are current at the time of preparation. This document and its contents are proprietary information and products of our firm and may not be reproduced or otherwise disseminated in whole or in part without our written consent unless required to by judicial or administrative proceeding. The ultimate decision to proceed with any transaction rests solely with you. We are not acting as your advisor in relation to any information contained herein. Any projections are estimates only and may not be realised in the future.

ASR has no position in any of the stocks mentioned.

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