Chile has become a haven for Argentine funds as buyers seek to avoid turbulence in the local markets prompted by the upcoming presidential elections.
"As of last year, we started to lower the position of our funds in Argentina, given that in the face of political uncertainty we are not finding strong buyers for local bonds," said Fernando Caffa, partner and commercial director at Compass Group in Buenos Aires.
In the last six months, the holding of Argentine common funds in Chilean bonds has more than quadrupled to US$443 million, according to specialised consultant 1816 Economía y Estrategia, which collects data from the regulator, the National Value Commission (CNV). The United States continues to be the main destination, expanding to US$509 million, from US$200 million at the end of October.
The stability of Chilean markets stands in stark contrast to Argentina’s volatility. In April, fears that President Mauricio Macri would not win re-election in October scared off investors. Sovereign bonds entered financial distress and the peso hit a new historic low that month.
Chilean bonds are also attractive because of low inflation rates in the country, currently at two percent per year, and the fact that it is an investment grade country. The Chilean economy is anticipated to grow 3.3 percent this year – the best pace of expansion among the region's major economies after Peru –versus a contraction of 1.2 percent in Argentina, according to analysts surveyed by Bloomberg.
This contrast is reflected in the returns. Chilean bonds denominated in dollars have gained 7.1 percent so far this year, exceeding the average of six percent growth in emerging countries, according to the index of Bloomberg Barclays, which tracks USD bonds of developing countries. Meanwhile, Argentina’s have dropped 0.3 percent, the worst performance after Mozambique and Turkey.
"The Argentines want to stay in dollars, but take refuge from the risk in the face of electoral uncertainty," said Guillermo Richards, director of Axis Inversiones. "We see a trend in which investors exit short Argentine instruments, which are going to beat them, to position themselves in the Latin American funds that exclude Argentina."
Compass's Latam fund has 45 percent invested in Chile, 18 percent in Brazil, 17 percent in the US and the rest in cash, according to Caffa, who adds that having a greater position in Chile also helps mitigate "the volatility that Brazil adds today" due to the difficulties that the country faces in carrying out a pension reform.
"The industry has to be reconverted in response to this new demand to be able to continue selling and to avoid rescues by the investors," he concluded.