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There was a time when Argentina would have had a much rougher ride in the turbulence that struck emerging markets earlier this year.

Argentina was spared the rout suffered by other markets such as South Africa or Turkey, now that – in stark contrast to the 1990s – its economy is protected by budget and current account surpluses, an undervalued currency, increasing foreign exchange reserves and reduced financing needs.

Significantly, the Argentine peso was virtually unaffected by the disturbances compared to most other emerging market currencies. It depreciated by just 1.3 per cent in the two weeks that followed the outbreak of fears on May 10 that a heavy US recession was on its way, compared with 15 per cent in both Brazil and Turkey.

“Investors are more discriminating nowadays, staying put in countries with current account surpluses and undervalued currencies, as in Argentina,” says Boris Segura, senior economist for emerging markets at Standish Mellon Asset Management.

Moreover, Argentina’s real economy is much less vulnerable to external shocks and was unaffected by the market turmoil in May and June, according to Esteban Medrano, an economist at Macrovision Consulting in Buenos Aires.

He points out that, largely as a result of the 2001 crisis, there have been net capital outflows in Argentina in the last ten years, in spite of high levels of foreign capital entering the country in the 1990s. “It’s not that we are now immune to external shocks, but we are much better insulated than in the 1990s,” he says.

Indeed, Argentina remains a volatile market, and it still suffered more than most Latin American markets. Spreads on Argentine bond yields over US Treasuries widened by 100 basis points from early May to late June, while the stock market tumbled by 20 per cent.

In the bond market, spreads have now tightened back to their former levels, and earlier this week they reached yet another historic low of 306bp over US Treasuries, Argentina’s lowest country risk rating since before its mega debt default in 2001. August was a strong month for dollar-denominated Argentine debt, particularly at the long end of the yield curve. The Par bond – the longest-dated instrument available – rose in value by 10 per cent.

The cheap lending rates have prompted Argentina to return to market and it announced on that it would soon sell $500m of a seven-year bond.

The healthy recovery of Argentina’s sovereign debt has been driven by declining yields on US Treasuries, but also the fact that it can easily meet its financing commitments for 2006. It effortlessly made the largest payment due since the default, for $2.3bn, at the beginning of August. This was thanks in no small part to the fact that it been issuing debt at below market rates to Venezuela in the past year.

Javier Alvarado, an economist at MVA Macroeconomia in Buenos Aires, sees the best opportunities now in the long end of the curve of peso-denominated debt, in particular the Discount bonds. With yields falling on US Treasuries, especially longer-dated debt, and the prospect of a “soft landing” for the US economy looking more likely, investors looking for higher returns are starting to see the attraction in Argentine debt again.

For those with lingering fears about inflation and growth in the US economy, some analysts favour the shorter-dated Nobac bills. Linked to the Badlar interbank interest rate, they are issued by the central bank in order to sterilise its foreign exchange interventions to maintain a weak currency, which is widely expected to continue.

“I think there is room for the Badlar rate to increase in the coming months on the back of the increase in reserve requirements im-posed by the central bank last month – the full effect of this has not materialised,” says Benito Berber, an HSBC economist in New York, who recommends buying Nobacs.

While the bond markets have performed strongly since the lows reached in late June, the same is not true of the stock market, which saw very little activity in August.

Having broken through the 1900 barrier in April, the Merval index was briefly pushed below 1500 by mid-June, wiping out all the year’s gains. Although it is now hovering below 1700, analysts harbour little hope of significant further rises for the time being.

Major Latin America funds prefer to channel their investments elsewhere, with Schroders, the asset manager whose Latin American fund was the biggest presence on Argentina’s stock market, still limiting exposure to Argentine stocks to about 5 per cent, compared with 54 per cent in Brazil and 28 per cent in Mexico.

Local analysts complain that companies’ profits are being squeezed by government policies that have lead to higher labour costs and price controls. “The prospects for the short term are not that great,” says Eduardo Fernández, of Rava Sociedad de Bolsa.

He says Tenaris, the stock responsible for the small Argentine index’s gains this year, accounting for a fifth of its value, is losing its shine and is “near its ceiling”.

This is the seventh article in a series about emerging markets investing. Read the others at: www.ft.com/emergingopportunities

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