12/09/2019 Feature Articles Back to all News & Views
August was a torrid month for investors in Argentine assets. After a poorer than expected performance by market-friendly Mauricio Macri in the first round of the Presidential election, fears of a return to populism caused the main index to plunge 37%. The currency also fell 20% against the US dollar, making the slump the largest one-day fall in any market since 1950. In addition, the yield on Argentine government bonds spiked to distressed levels, with the likelihood of a debt default in the next five years spiralling to 75%.

Emerging Markets (EMs) continue to grow at a much faster rate than Developed Markets. Whilst the sheer size of the market movements has been unprecedented, investors should be aware of the risks inherent in EMs. However, recent evidence would seem to indicate that they are not.

In the first half of 2017, Argentina raised $12.75bn on debt markets via auction, with the last tranche of $2.75 billion issued for a term of 100 years! US Treasury Secretary Steven Mnuchin has said that the US government is considering issuing 50- and 100-year debt; however, we question such a bond issue for a country like Argentina, which has defaulted on its debt eight times since independence in 1816 – the 2001 default on $100bn of bonds was the world’s largest at the time. It has defaulted as recently as 2014 and settled a dispute from its 2002 default as late as 2016. Claudia Calich, lead manager of M&G Emerging Market Bond fund, called the term into question. Her team’s attempt to model risk for the issue had ‘stalled’ at a 50-year term when the risk of default reached 97%. So, with the country’s poor credit history and experienced investors highly sceptical of the issue (Claudia did not invest), why was the 100-year issue more than 3 times oversubscribed?

Our suspicion was (and is) that this was a serious case of ‘confirmation bias’, where you believe what you want to be true. At the time, investors justified the decision on the basis that President Macri would be able to change behaviour entrenched for many years (one analyst was quoted as saying “the country’s next 100 years will be very different than the last century”) and that the possibility was low of a rise in populism that would revive the Peronist Party. Well, every asset bubble has to have a believable narrative.

Recent events in Argentina show that confirmation bias can be hard to spot, as investors are often unaware of their blind spots and it's easy to be seduced by a promised yield of 7.9%. Overcoming bias requires regular review of investment decisions and an ability to challenge one’s own instinctive position. An investment committee of people with different backgrounds and personalities is one of the best safeguards, allowing for challenge in a collegiate environment. When allied to an ability to analyse events and data coldly, avoiding other detrimental behaviours such as ‘fear of missing out’ can minimise the chance of falling foul of confirmation bias. Even with stringent structures and approach, no group can avoid such pitfalls 100% of the time; however, in the case of Argentine centennial bonds, the pitfall was clear. Never forget: if it looks too good to be true then it probably is!