Argentina has 99 problems, and the exchange rate of the peso is just one of 'em.
It's not bad enough that the Argentine peso has lost more than half its value against the dollar over the past year. Today we learned from The Wall Street Journal that Argentina's entire GDP declined 4.2% in the second quarter versus last year's Q2 after a drought slashed agricultural production.
This is hardly the kind of news you'd expect to spark a rally in the stocks of Grupo Financiero Galicia (NASDAQ: GGAL), Banco Macro SA (NYSE: BMA), or Loma Negra Compania Industrial (NYSE: LOMA) -- yet rally they did. As of 3:30 p.m. EDT on Thursday, Grupo Financiero Galicia shares were up 12.5%, Banco Macro did a bit better with a 13.1% gain, and Loma Negra did best of all: up 20.7%.
Is there any logic to this rally? Perhaps. At last report, $1 was buying 38.21 Argentine pesos, a 2.9% appreciation in the value of the peso versus the previous day's closing exchange rate.
The more valuable the peso, the more valuable the profits earned in pesos for these three companies. Just as important, with Grupo Financiero Galicia and Banco Macro being banks that borrow money to lend, and Loma Negra an industrial company with substantial borrowings of its own, the more valuable the peso, the easier it is for these companies to repay any debts they've taken out in foreign currencies.
Granted, I'm not 100% certain that a less than 3% increase in the peso-to-dollar exchange rate justifies a 20% leap in the share price of Loma Negra, for example. But this news is at least an incremental positive for Argentine stocks.
The question investors need to ask now is: Where do we go from here?
Thursday's miserable Q2 economic news certainly doesn't bode well for the Argentine peso continuing to strengthen. And yet, it did strengthen today, against the odds -- so who really knows? There's also the possibility that an upcoming $50 billion loan from the International Monetary Fund might save the day.
One thing's for certain: At P/E ratios of 7.0 (Banco Macro), 10.2 (Grupo Financiero Galicia), and even 19.4 (Loma Negra), Argentine stocks look awfully cheap when placed side by side with America's own S&P 500, where the average stock costs more than 25 times earnings .
Maybe that fact alone is enough for a rally in Argentine stocks.
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