Argentina Stocks Look Attractive Now

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The Argentine equity market was one of the best performing markets last year. The Merval index performed better than Mexico, Brazil and other peers but behind Chile and Peru. However, this year Argentine stocks are laggards among emerging markets.

While emerging markets in general are down this year due to inflation risks and other factors, stocks in Argentina are in a downward trend for entirely different reasons. Those reasons include the increasing number of investor-unfriendly actions taken by the Argentine government. For example, last month the government increased its influence in 42 private companies. From a FT news report:

Argentina’s government is poised to increase its influence in 42 private companies – including big banks, a steelmaker and the biggest media group – in which it inherited stakes when it nationalised private pension funds in 2008.

The move raised concerns among some investors about government interference, but analysts said it did not yet signal a creeping nationalisation.

An emergency decree on Wednesday scrapped a 5 per cent limit on voting rights which had applied to private pension funds’ holdings in companies. The government can now seek more directorships and a greater say in decision-making.

Until now, “it didn’t matter how big a stake Anses [the Argentine state pensions body] had in a company, it had to exercise its right as if it had only 5 per cent of the total,” said Amado Boudou, the economy minister. Now, Anses would “have a presence in accordance with the share capital it possesses, without limitations, and will be on the board”, he said.

The Argentine government holds major stakes in Banco Macro (BMA) – the large bank by market value, Telecom Argentina(TEO), Pampa Energia(PAM), etc. The graphic below shows the YTD performance of all the exchange-listed Argentine stocks trading on the US markets:

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Source: www.adrbnymellon.com

Except Alto Palmero all the stocks are in the red YTD with Banco Macro down nearly 34%. The stock current has 6.30% dividend yield. Bbva French Bank(BFR) has a dividend yield of over 12%. The integrated oil and gas company YPF SA (YPF) is one of the largest companies by market capitalization. At the current price of $44.36 it pays a 7.74% dividend.

From an investment perspective, Argentine stocks are trading at a P/E of about 15 compared to a P/E of 21 for Chile, 17 for Colombia, 12 for Brazil and 13 for Mexico.The current dividend yield of Argentine stocks is 4.1% which is higher than the peer countries mentioned. Investor’s fears of nationalization of  private companies are vastly unfounded. Argentina is a strong export-led economy and the domestic market is vibrant as well. The country is a large exporter of agricultural products such as soya beans which are in high demand in other emerging countries especially in Asia.Hence investors with a long-term horizon may want to add some of the large-cap Argentine ADRs at current levels.

Disclosure: Long BMA

Related article: Hungry China Shops in Argentina

Lists: Top 20 Pharmaceutical Companies in China’s 18 Drug Markets

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Global pharmaceutical companies are expanding big in China and other emerging markets. With a population of over 1.3 billion and growing middle-class, the Chinese healthcare market has lots of potential for growth. Following the strategy of these drug firms, investors may also want to gain exposure to the Chinese healthcare market by adding these companies to their portfolios selectively.

For example, western companies appearing among the top companies in China’s Anti-Diabetics Drug Market include:

  • Bayer (BAYRY)
  • Eli Lilly (LLY)
  • GlaxoSmithKline (GSK)
  • Novartis (NVS)
  • Novo Nordisk (NVO)
  • Pfizer (PFE)
  • Sanofi-Aventis (SNY)

For the top 20 firms in other markets such as Anti-Allergic, Anti-Asthma, Anti-BPH, Anti-Depressant, Anti-Diabetics, etc. click on the pdf report below.

Download: Top Drug Companies in China

Source: Draco Healthcare Consulting, LLC

Disclosure: No positions

Share of Government Employment in Labor Force Across OECD Countries

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The chart below shows the share of general government employment in total labor force across OECD countries:

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Source: Bringing French Public Debt Down: The options for fiscal consolidation by Balázs Égert, OECD

The Scandinavian countries of Finland, Sweden, Denmark and Norway have the highest percentage of government workers relative to the total labor force. This is not surprising since they follow the ultra-socialist form of government and have very high tax rates. The governments there are considered as “employer of the last resort” where a citizen will get a job should they be unsuccessful in securing a job in the private sector.

Excluding Scandinavian countries,  France has the largest workforce in government employment with over  with over 20% of the total workforce in the public sector. However the public-sector efficiency is very low. As a result the French government gets less productivity despite government expenditures in relation to GDP staying very high year-after-year.

27 Foreign Stocks Paying Dividends Quarterly

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Many investors have the view that foreign stocks pay dividends only annually. However this is not fully true. There are many foreign companies that pay dividends on a quarterly basis just like their U.S. peers. For example, European firms usually pay dividends twice a year – one in the form of interim dividend and the other as a final dividend. Most Latin American firms follow the U.S. model and pay quarterly dividends.A few Latin American firms such as Itau Unibanco (ITUB) pay a small monthly dividend.

Unlike most U.S. firms, dividend payments made by foreign firms can be volatile and vary based on earnings.However due to taxation laws and policies, foreign companies generally tend to have higher payout ratios than U.S. firms. So U.S. investors looking to add some overseas stocks that pay dividends quarterly and have high yields can choose from a wide universe.

The table below lists 27 foreign stocks(excluding Canada) paying quarterly dividends:

[TABLE=949]

Disclosure: Long ITUB, STD, BBVA, EC

Caution Warranted on Investing in Bank Stocks for Dividends

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Dividend is a powerful variable that confirms the profitability of a company. Unlike many other financial factors that can be used to evaluate a firm, dividend is a simple and quick way to determine a firm’s financial strength. However just dividend payment themselves do not give the full financial picture. This is especially true with banks. In recent months many banks have raised dividends on the back of rising earnings and lower loan losses. At current price levels, many bank stocks pay above-average dividend yields. But before jumping into these stocks investors may want to analyze if these yields are sustainable. The Wall Street Journal recently had an article about bank dividends and discussed in detail using New York Community Bancorp (NYB) as an example. From the article:

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A hefty dividend can be a source of strength, especially in these yield-deprived times. It can also become an Achilles heel.

That is the risk for investors in New York Community Bancorp. At 6.2%, it has the highest dividend yield of any significant U.S. bank.

Yet New York Community’s first-quarter payout of 25 cents a share is equal to nearly 90% of net income. In 2010, the bank’s dividend payout was 80% of net profit. That is high, and well above the 30% threshold the Federal Reserve favored when assessing capital-return plans for some big banks.

So far, it hasn’t been a problem. When asked on the bank’s recent earnings call if the 30% level might be applied to other banks, Chief Executive Joseph Ficalora said, “It’s been indicated, at least, in all conversations we’ve had in Washington that that would not be the case.”

Still, investors will have to be watchful for any changes in regulatory views. This also puts the company under additional pressure—any falloff in earnings that propels the payout ratio to over 100% could lead to heightened scrutiny. That has happened before—from 2005 to 2010, New York Community paid $1.98 billion in dividends, $160 million more than it earned over that period. But that was during a different regulatory time.

The immediate question for investors is whether the dividend is sustainable since it underpins the stock. Although down about 11% this year, the shares trade at about 2.3 times tangible book value, a roughly 70% premium to peers.

The SPDR KBW Bank ETF (KBE) tracks the performance of KBW Bank Index.The fund has 26 holdings and a dividend yield of 0.60%.