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ARGENTINE STOCKS SPURT FADES AHEAD OF IMF DEAL, EASING CAPITAL CONTROLS

Investors have taken a backseat on betting on Argentina's stellar economic performance as they keenly await pivotal catalysts - a new IMF loan that could lead to the relaxation of capital controls.

The Merval stock index .MERV has fallen over 9% so far this year, and on Friday EPFR data showed Argentine equities funds have now posted three-straight outflows with the latest week seeing the biggest since the organization started tracking the group in 2000.

The main index has also underperformed other markets in the region that have been in the crossfire of U.S. President Donald Trump's trade wars, such as Mexico .MXX and Colombia .COLCAP, that have gained 6.8% and 17.6%, respectively.

Analysts point to some profit taking after the stock index shot up more than 10 fold over the past two years and the next catalyst is the release of a new International Monetary Fund (IMF) program, which is due sometime in the next two months and is estimated to be valued between $10-$20 billion.

The subsequent easing of capital controls could cause some short-term pain for local Argentineans through increasing inflation pressures, but could open the floodgates of foreign investment in the long run. However, the timing is critical for Milei who faces midterm elections in October.

"That mismatch worries Milei and he is delaying the release of the FX controls to avoid paying a political price," said Eduardo Ordonez Bueso, an emerging markets debt portfolio manager at BankInvest.

Still, stock market valuations are yet to balloon, when comparing the stock market capitalization to gross domestic product $(GDP)$, popularly called the Warren Buffett indicator.

A value over 100% is considered overvalued and a number under 100% is considered to be undervalued. The Merval index stands at about 4% compared to the country's quarterly gross domestic product $(GDP.UK)$, according to data compiled by LSEG.

Referring to the catalysts, Malcolm Dorson, head of emerging markets strategy at Global X said "once these boxes are checked, look for large index providers to include Argentina into their Emerging Markets indexes, which could bring a wave of both passive and active flows."

(Johann M Cherian)

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