Bagging a bargain in Argentina

My recent journey to Buenos Aires gave me everything I expected - and plenty I didn't.

I did not expect, for example, to whirl around in a crowded bar and spy my friend being licked in the face - like a kitten being bathed by its mother - by a tall, 30-something Argentine man. The fellow claimed that's how passionate Argentineans kiss their ladies.

My friend, unfortunately, was not elated at her need for a mop after the 'passion' and we fled the bar.

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I did not expect to find a mullet haircut on the head of seemingly every male around. I did not expect to find Irish bars on every corner. I did not expect to get an incessant parade of curious stares because of my blond hair and American clothes. I did not expect to feel relatively safe from thugs, thieves and kidnappers during my entire stay.

And, despite everything I'd read, I certainly didn't expect to find the country on such a firm track to stability just three years after its complete economic collapse.

Sure, I got everything I expected - the seductive tango dancers around every corner, the charming street fairs, the European architecture and cobblestone roads, the incredibly tender free-range beef and phenomenally cheap prices. But it's what I found in the unexpected that truly amazed me.

Imagine waking one bright morning, hurriedly lacing up your shoes and heading out early. You walk briskly to your first stop, the bank. It's the end of the month and you need to make a big withdrawal to pay rent, electric and telephone bills and do a little grocery shopping.

Passing some curious protests in the streets, you are slammed with a life-altering realisation when you reach the bank: Your account balance has been slashed by one third, and you can't even touch the remaining two thirds because the government has put a 90-day freeze on all bank accounts.

And we're not talking risky investments here - we're talking supposedly cast-iron savings accounts.

You can't pay your mortgage, you can't take out money for lunch, you can't buy gas, you can't pay your child's tuition, you can't even get a few bucks for the bus home.

Though this scenario sounds like nothing more than a ghastly dream to us, this living nightmare actually happened to the people of Argentina just three years ago.

As many of you will recall, Argentina was a Wall Street darling in the late 1990's. US investors loved the country like a fat kid loves cake. But Argentina was borrowing vast amounts of money, and by 2001 the rubber band snapped and a catastrophic economic collapse ensued.Fortunes evaporated overnight. Riots broke out in the streets. Poverty levels soared to new highs. And the flailing Argentinean government could not even begin to pay back its IMF loans or honour its bonds. The country found itself in debt totalling more than US$102 billion.

Argentina devalued its peso, which was previously artificially pegged to the US dollar. The exchange rate became free to float and the US dollar first jumped to 1.80 pesos, then to 2 pesos and more.

'Stagflation' - a corrosive mix of high inflation and economic stagnation - set in, and, fearing for the future, desperate Argentinean citizens flocked to the exchange markets and bought dollars, even by the tens or hundreds, with whatever money they could scrounge up. Their bank accounts were frozen by the government-imposed 'corralito' to prevent capital flight. The exchange rate jumped to 2.50, then to 3 pesos per dollar.

But now, just three years after defaulting on the largest debt in modern history, Argentina is a screaming buy. I can attest to the notion that Buenos Aires is a world-class city in a thriving country. In fact, I believe Argentina to be the absolute cheapest country in the Western World.

Argentina has a truly Western culture, as more than 95% of its citizens can directly trace their roots back to Europe. Buenos Aires is a very European city, often dubbed the 'Paris of South America', though I read an article the other day describing Paris as the 'Buenos Aires of Europe.'

That Western feel is particularly attractive to investors who are hesitant about the South American political wild cards. Argentina benefits from a highly literate population, and many foreign companies are even beginning to move their outsourcing centres from India to Argentina because of the country's well-educated (and cheap) workforce, as well as the more favourable time difference for US businesses.

When inflation was skyrocketing in Argentina in the early 1990's, many transplanted Europeans trekked back to their homeland. But now, with prices in Argentina so cheap, the Europeans are going 'bottom-fishing' and returning once again to live and invest.

Here's just one example of 'cheap': wine, appetizer, tender juicy steak and potatoes, and coffee for 10 pesos. That's roughly $3.45. A 10-minute taxi ride across town? Five pesos, or about $1.74. I took a ride of comparable length in New York City a few weeks ago that cost $20.

After visiting several top publicly traded companies, being treated to a private tour of the Buenos Aires stock exchange, interviewing busy CEOs and exploring the burgeoning real-estate market firsthand, I stand firm in my belief that Argentinean stocks, for the most part, are overlooked and undervalued.

But the rise is already starting...so please, forget everything your gut tells you about investing in a country recently arisen from the ruins. Argentina isn't the first and probably won't be the last country to break out after a severe economic crisis. During Mexico's so-called 'Tequila Crisis' of 1994-1995, the currency lost half its value in just a few months. Mutual funds that invest in Latin American stocks saw their value slashed by 16% ($600 million) in a matter of days.

Mexican media giant Grupo Televisa's shares plummeted following the peso devaluation, falling to lows of $11.84 in March, 1995. But by April 1996, shares were on the rebound and already back to trading at US$30.24 - adding 155% in just 13 months. By 2000, shares were trading north of $80! That's more than 576%!

In 1998, Russia was plagued by political instability and fiscal imbalances. The IMF lent Russia billions of dollars during the summer of 1998 in an attempt to prevent the devaluation of the rouble, whose collapse brought the world financial system close to a meltdown.

During the economic turmoil, Russian telecom Rostelecom fell from upwards of $20 to lows below $4. By mid 1999, ROS had recovered by 200% to trade for $12. By 2000, ROS shares were trading above $27 - a 575% premium over devaluation lows!

Brazil caused global shockwaves in 1999 when its financial instability prompted a devaluation of its real in January 1999. Telecom giant Brasil Telecom Participacoes SA sank to trade at $24.63 that month. But just one year later, in January 2000, BRP was trading at $88.35 - a full 259% higher.

I travelled to Argentina with a basic premise: that Argentina had probably survived the worst of its economic crisis; that conditions in the country and its economy were steadily improving; and that there were still strings of profitable opportunities in the country for savvy investors.

And it looks like my hypothesis is proving true month after month.

Argentina's benchmark Merval index just hit a fresh record high of 1,665 that's a 52-week surge of 54%. And if you look at a two-year chart of the benchmark Merval, you'll see that the index is not going to stop here.

Here's to the unexpected,

By Erin Beale for the Daily Reckoning

Erin Beale is one of the team of editors of Red Zone Profits, a US investment service that combines the safety of fundamental value and the power of technical analysis.