A new way to buy Argentina ahead of expected MSCI boom

MSCI Inc. announces next month whether Argentina will be upgraded to emerging-market status from frontier

15:05 May 19, 2017

Buenos Aires

Investors are about to get a fresh way to play Argentina.

Shares of the nation’s stock exchange operator, Mercado de Valores de Buenos Aires, have for years been restricted to brokers, who have enjoyed a 102 per cent jump over the past 12 months. That’s about to change.

After a merger with Bolsa de Comercio de Buenos Aires and a name change to Bolsas y Mercados Argentinos, or BYMA, the newly formed entity’s shares are set to start trading on the open market imminently. Everyday investors and mutual funds will then have access to the surging shares, and, if they can get in early, they’ll have the opportunity to bet on a potential boom before MSCI Inc announces next month whether Argentina will be upgraded to emerging-market status from frontier.

In other words, instead of being limited to investors with $26 billion in assets, the country will be open to those who can access emerging-market status nations — and their assets are valued at a total of $1.6 trillion.

Mauricio Lerner is among those who has watched from afar as Merval shares rose more than four times the benchmark index in 2016. The investor, employed at a family-owned curtain and bed-sheet factory in Buenos Aires Province, is among those now eyeing the chance to get a piece of the action.

“Buying BYMA’s a bet that Argentina’s market will grow and will start to move volumes as large as our peers,” Lerner said in an interview.

Regional Trend

The process of allowing actors beyond brokers to own shares of the stock market, known as demutualisation, began with Stockholm’s stock exchange in 1993 and took off in Latin America with Brazil in 2007 and Mexico in 2008. Chile’s Bolsa de Comercio de Santiago approved going through the process last year.

Such public offerings tend to lead to more value for the exchanges, according to a Cornell University study by finance professor Maureen O’Hara. There’s “less complex corporate governance, which in turn allows the exchange to be more innovative,” she said in an email.

BYMA will be in a strong position to benefit from slowing inflation and an economy expected to resume growing. Argentina’s market capitalisation of about $81 billion is equivalent to 8.5 per cent of gross domestic product, compared with Brazil’s market cap of 19 per cent and Colombia’s of 23 per cent, according to data compiled by Bloomberg.

Core Value

Holders of Merval will soon get 250,000 shares of BYMA for each share they currently own, which will make up 60 per cent of the new company. The remaining 40 per cent of BYMA is owned by Bolsa, which must divest 20 per cent under regulator rules. Bolsa sold 5 per cent of its stake to its members and employees at 56 pesos ($3.61) per share, and has until the end of December to sell the rest.

BYMA is expected to trade at 122 pesos per share by end of 2017, according to a Capital Markets Argentina SA note, while TPCG Valores SA analysts have a target price of 100 pesos per share.

The most valuable part of the new company is its Caja de Valores business, which acts as Argentina’s central depositary of public bonds and private securities, according to Santiago Lopez Alfaro, a director at Buenos Aires consulting firm Delphos Investment. That business’s revenue, estimated by Delphos to represent 75 per cent of BYMA’s value, is expected to directly gain if market activity grows and demand for the custodian’s services rises.

“That business could be threatened in the future as there aren’t legal barriers for the entry of new players,” Lopez Alfaro said. “But the short-term natural barriers for new players are high in this area.”

Growing Exchange

BYMA is seeking to create a separate classification panel for some stocks, based on Brazil’s Novo Mercado, which has higher standards for disclosure and corporate governance. It also hopes to offer a locally-traded exchange traded fund by the end of the year, said BYMA General Manager Jorge de Carli, and is assessing ways to generate long term revenue through data providing services. Until then, the bet is on market growth.

“In the short term, we expect BYMA revenue will jump as transactions grow 20 to 30 per cent by early 2018 due to a larger scale of business,” he said. “We hope the economic context collaborates.”