What factors led to your decision to invest in Argentina?
We have developed a quantitative matrix of 205 ETFs that we rank weekly based on total returns over the intermediate term. This list of 205 ETFs includes those focused on U.S. equity style boxes and factors, U.S. sectors, international equity, fixed income, currencies, and commodities. There are 84 single country and regional ETFs within the international equity category. In the case of international equities, the top 16 out of the 84 eligible ETFs become candidates for inclusion in the portfolio. With respect to Argentina, we knew that the country had gone through a few terrible years lately, both economically and in equity market performance. As sentiment and performance began to turn, we became interested as it rose into the top half of our rankings and then even higher.
We tend to find the most success in ETFs that have had multi-quarter and multi-year underperformance, but then experience positive changes and finally begin to find their sea legs. Our research has shown that historically after a long period of underperformance (like we saw in Argentina over the past few years), the likelihood of an ETF then entering a period of strong, sizeable outperformance is greater. Considering this, we feel that the Global X MSCI Argentina ETF (ARGT) is an ideal holding for our portfolio.
When looking at relative strength, are you comparing Argentina to other developing nations or to a broader group of equities?
We compare all international ETFs – developed, emerging, and frontier – in a matrix that ranks them by their relative strength. This rankings-based methodology is flexible and can invest anywhere. An important aspect of the matrix is that the U.S. itself is a country and potential holding, and we find that the U.S. equities often rank very highly during global market weakness. Aside from using the rankings-based methodologies as the primary filter for choosing holdings, our other major concern is constructing a portfolio that avoids too much concentration. We end up spending much of our time thinking about how much hidden risk, such as currency, sector, or commodity risk, is contained in the portfolio.
Do you see positive relative strength among the broader emerging markets right now, or is this really an Argentina-specific story?
We do see a number of emerging markets rising through our ranking system, but we believe what’s more important than a country’s level of development right now is its exposure to commodities. Many of the international ETFs rising through our rankings are commodity complex-centered countries. Argentina itself has 30% of its portfolio in Energy and 6% in Basic Materials.1 Having 36% in the commodity complex is not extremely high for an emerging market, but we see others like Peru, Russia, and some developed markets like Canada Small Cap, and Norway with very high commodity exposures that are rising through our rankings.
We believe what has been holding back the relative strength of the broader emerging market space is weakness in China. When you include A-Shares2, China is a huge weight in most broad emerging markets indexes, but the country’s stock market has been persistently weak over the last twelve months. Therefore, we prefer to slice the universe more narrowly to find opportunities within the emerging markets where there is strength.
Much of the momentum in Argentina has been driven by the positive sentiment around President Macri and the reforms he has implemented in his first few months in office. Do these factors explicitly come into consideration when you consider investing or are they implicitly considered through the relative strength analysis of Argentina?
Our relative strength-based methodology is completely agnostic as to why an ETF ranks highly or poorly. The methodology attempts to pursue strong relative performers, as we have observed their strong performance continue over the intermediate term. Therefore, investing in Argentina was entirely based on recent performance and not due to a qualitative analysis of recent political changes. Our belief is that every day the market prices in all of these factors into equity prices, and we prefer to trust the market’s collective wisdom in the form of real prices and returns.
Is there any consideration for Argentina’s valuations, or is the analysis purely based on relative strength?
The analysis is based purely on relative strength. However, just as we favor ETFs rebounding from periods of weakness, we prefer to see ETFs that we judge to have both attractive valuations and that are showing relative strength. The reasoning makes intuitive sense – an ETF with both attractive valuations and positive relative strength has both momentum and value characteristics, possibly setting it up for a period of strong future performance. The latest data on the MSCI Argentina Index3 (as of 5/31) shows a 12 month forward P/E4 of 11.31. Thus we find Argentina to be very attractively valued, and while it presents both opportunities and risks, we believe that we will be adequately compensated for taking those risks.
1. ETF.com. As of 5/31/2016.
2. A-Shares: Shares of companies listed on stock exchanges in mainland China.
3. The MSCI Argentina Index is designed to measure the performance of the large and mid cap segments of the Argentine Market.
4. Forward Price to Earnings (P/E) is the price of a share of a security divided by its per share expected earnings. It is used to determine whether a stock is cheap or expensive.
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Investing involves risk, including the possible loss of principal. International investments may involve risk of capital loss from unfavorable fluctuation in currency values, from differences in generally accepted accounting principles, or from economic or political instability in other nations. Emerging markets involve heightened risks related to the same factors as well as increased volatility and lower trading volume. Securities focusing on a single country may be subject to higher volatility.
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The opinions expressed are those of the Clark Capital Management Group Investment Team. The opinions referenced are as of the date of publication and are subject to change due to changes in the market or economic conditions and may not necessarily come to pass. There is no guarantee of the future performance of any Clark Capital investment portfolio. Material presented has been derived from sources considered to be reliable, but the accuracy and completeness cannot be guaranteed. Nothing herein should be construed as a solicitation, recommendation or an offer to buy, sell or hold any securities, other investments or to adopt any investment strategy or strategies. For educational use only. This information is not intended to serve as investment advice. This material is not intended to be relied upon as a forecast or research. The investment or strategy discussed may not be suitable for all investors. Investors must make their own decisions based on their specific investment objectives and financial circumstances. Past performance is not indicative of future results.
Clark Capital Management Group, Inc. reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs. The information provided in this report should not be considered a recommendation to purchase or sell any particular security, sector or industry. There is no assurance that any securities, sectors or industries discussed herein will be included in or excluded from an account’s portfolio. It should not be assumed that any of the investment recommendations or decisions we make in the future will be profitable or will equal the investment performance of the securities discussed herein. The relative strength measure is based on historical information and should not be considered a guaranteed prediction of market activity. It is one of many indicators that may be used to analyze market data for investing purposes. The relative strength measure has certain limitations such as the calculation results being impacted by an extreme change in a security price.
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