June 21, 2017 / 4:47 PM / 3 months ago

Argentina stocks tumble, peso hits record low on MSCI snub

BUENOS AIRES/NEW YORK, June 21 (Reuters) - Argentine stocks tumbled and the country’s peso currency fell to a record low on Wednesday, a day after index provider MSCI surprised investors by not promoting the country to its emerging markets index.

Argentina’s benchmark Merval stock index slumped 5 percent, while the peso currency dropped as much as 2 percent to 16.47 per dollar.

MSCI said it needed more signs that center-right President Mauricio Macri’s pro-market reforms were “irreversible” to reincorporate the country’s shares into its emerging markets index, which guides major developing country stock allocations worldwide by investment funds. “All the ingredients are there,” MSCI head of index management research Sebastien Lieblich said on a Wednesday conference call. “It remains only to be seen if the ingredients will be maintained over time.”

Argentina’s inclusion as an index constituent would have encouraged funds to invest in Argentina to match or outperform that gauge. The Merval index had risen nearly 25 percent in 2017 ahead of Tuesday’s decision in part because investors were betting on an upgrade, which could have triggered inflows.

“The expectations generated in recent months have turned into disappointment,” Buenos Aires investment advisor Portfolio Personal said in a note.

Argentina’s surprise launch of a 100-year bond on Monday was three times oversubscribed, a sign of investor confidence in the longevity of Macri’s reforms.

On assuming office in December 2015, Macri declared Argentina open for business after more than a decade of sweeping state intervention, including capital controls, had choked off much foreign investment.

MSCI in 2009 had relegated Argentine stocks to its “frontier” index, which encompasses smaller and less developed stock markets.

Investors said the MSCI decision did not change fundamental optimism about Argentina, where the economy is expected to grow around 3 percent this year after falling 2.3 percent in 2016, and inflation is seen at half last year’s 40 percent.

“It probably makes us a bit more negative in the very short term, but in the long term what we’re focused on is the direction of the reforms,” said Leigh Innes, lead portfolio specialist for frontier markets strategy at T Rowe Price.

While Macri has gotten rid of many investment obstacles including a holding period for foreign capital, investors are still wary of high capital gains taxes and the market regulator’s ability to intervene in company affairs.

Macri has proposed a capital markets reform addressing those issues, but it remains stalled in the opposition-controlled congress.

“The local market is still hard to access,” said Asha Mehta, senior portfolio manager at Acadian Asset Management in Boston. (Additional reporting by Trevor Hunnicutt and Caroline Valetkevich in New York, Bruno Federowski in Sao Paulo, Jorge Otaola in Buenos Aires and Michelle Price in Hong Kong; Writing by Luc Cohen; Editing by Christian Plumb and W Simon)

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