Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 221

Fear of missing out trumping fear of loss

In the early 20th century, Argentina was one of the world’s wealthiest nations, thanks to an educated workforce and agriculture. But after a litany of economic and financial crises, Latin America’s third largest country is not high on the list of places to invest for Australian investors.

Just three years ago it was being sued by investors, while simultaneously trying to avert its second debt default in a decade. Government ineptitude and volatile commodity prices have conspired to plunge millions of citizens into abject poverty.

A brief history of Argentina’s economic and financial crises is instructive, because while you may initially wonder what this has to do with you, the market’s current attitude to Argentina is vital in understanding where your returns are likely to go.

Impact of disappearing exports

In the 1930’s, Argentina was unable to escape the Great Depression as demand for its commodity exports vaporised. With government budgets plunged into deficit and public-sector workers unpaid, the military staged a coup in 1930 against the country’s democratically elected president.

Thanks to this precedent, and due to frequent economic disruption, more military leaders led the country than civilians throughout the 20th century, and between 1930 and 1983 presidents averaged only two years in office while the minister for economics was replaced annually.

After a brief period of post-war prosperity, in the early 1950s, commodity prices fell again. The nationalistic president Juan Domingo Peron took possession of British-owned railroads causing foreign investment to dry up. When inflation soared to 40%, real wages collapsed, and strikes following the death of Peron’s wife Eva Peron (you may recall the song ‘Don’t Cry for Me Argentina’) caused the country to grind to a halt. The military intervened again.

In the 1970’s the military regime was being begged by the constituency to return Peron from exile to the presidency and thanks to memories of the post war prosperity the generals relented. Peron died the following year.

Unsurprisingly, when the country made a former exotic dancer and Peron’s third wife his successor, several military and para-military factions struggled for control. In 1976, with inflation at 600% military generals staged another coup.

Many readers may recall the invasion of the Falkland Islands, a British colony, in 1982 with Argentina losing the brief war to the British. After the loss and human rights abuses during a war known as the ‘Dirty War’, the military was disgraced and democracy returned to Argentina, seemingly permanently, in the 1980’s.

Political and economic stability don’t go together

But political stability has not lead to economic stability. An expansion of government offices under president Raul Alfonsin, caused public sector wages to grow exponentially. Meanwhile, lax tax collection systems saw only one tenth of 1% of the population of 30 million Argentines paying income taxes. The consequential impact on the government’s budget and foreign investment saw inflation reach an unprecedented 5,000%. With rioters clearing out supermarkets, Alfonsin handed the presidency over to his elected successor, Carlos Menem, almost six months early.

According to many reports, Menem spent the 1990s attracting foreign investment, selling off loss-making state enterprises and cutting import tariffs. Inflation fell to single digits, and Argentina became the International Monetary Fund’s (IMF) poster child for free-market reform.

By the turn of the Millennium and Menem’s departure however, corruption was rife and Asia, Brazil and Russia’s financial crises saw foreign investment flee emerging markets like Argentina. Maintaining Menem’s Peso peg to the US dollar was impossible and, unable to print money, the government borrowed heavily.

In 2001 the country declared the largest sovereign debt default in history and a depression followed. In terms of income, over 50% of Argentines were ‘poor’, as were seven of every 10 Argentine children at the depth of the crisis in 2002.

In 2003, economic growth returned to an average rate of 9% for five years. GDP exceeded pre-crisis levels by 2005, and Argentina resumed repayments on defaulted bonds. By 2010, 93% of bonds were brought out of default through a second debt restructuring. According to most reports, bondholders who participated in the restructuring have been paid punctually and have seen the value of their bonds rise. In 2006 Argentina repaid its IMF loans in full. In 2016 Argentina came out of the default when the new government decided to repay the country's debt, finally paying the full amount owed to litigious hedge funds.

Argentina is a country where economic instability is normal and locals will tell you another ‘crisis’ is underway or on the way. The country however has experienced its best run of growth since the post war boom thanks to high prices for commodities, due largely to demand from China.

Foreign investment returned in 2016, but the Peso has slipped to fresh record lows in recent months as government spending on social welfare programs, current account deficits and printing of new money has again fuelled one of the world’s highest inflation rates at 20% per annum.

Ok, so now you know something about Argentina going back nearly 90 years. What does it have to do with you? Well, just a few months ago Argentina joined Mexico, Ireland and the U.K. in issuing a 100-year bond. Only 12 months after it emerged from its most recent default the bond issued was massively oversubscribed, such is the desire for yield by global investors.

Another default in Argentina?

According to Reuters, Argentina received $9.75 billion in orders for the 100-year bonds and sold $2.75 billion at a final yield of 7.9% with a 7.125% cash coupon. That’s just 5% more than what investors are willing to lend at to the US government.

A reasonable question to ask is: do you think, inflation, higher interest rates or a default might happen in Argentina in the next 100 years? If the answer is yes, and that’s what the history lesson was for, then investors who hold this bond will have to endure capital losses at some point, while receiving a yield that is insufficient to compensate them for the risk.

When share market investors, including Australian investors paying high price to earnings (P/E) ratios of above 18 times, suggest high P/Es are appropriate given low interest rates, they are playing the same relative value game as the Argentinian bond investors. You can only accept paying a very high P/E if you also accept very low prospective returns.

The Argentinian bond issue, which coincides with Ivory Coast and Senegal offering 16-year bonds at 6.25%, Greek 5-year bonds at 4.63%, Iraq 5-year bonds at 6.75% and Ukraine 10-year bonds yielding 7.3%, suggests the market is at it again. It fears missing out more than it fears losing money.

 

Roger Montgomery is Chairman and Chief Investment Officer at Montgomery Investment Management. This article is for general information only and does not consider the circumstances of any individual.

  •   4 October 2017
  • 1
  •      
  •   

RELATED ARTICLES

Hedge funds seizing ships – what next?

Less than 1% for 100 years: watch the price risk on long bonds

Bond demand is dumb, dumber and dumbest

banner

Most viewed in recent weeks

The growing debt burden of retiring Australians

More Australians are retiring with larger mortgages and less super. This paper explores how unlocking housing wealth can help ease the nation’s growing retirement cashflow crunch.

Four best-ever charts for every adviser and investor

In any year since 1875, if you'd invested in the ASX, turned away and come back eight years later, your average return would be 120% with no negative periods. It's just one of the must-have stats that all investors should know.

LICs vs ETFs – which perform best?

With investor sentiment shifting and ETFs surging ahead, we pit Australia’s biggest LICs against their ETF rivals to see which delivers better returns over the short and long term. The results are revealing.

Family trusts: Are they still worth it?

Family trusts remain a core structure for wealth management, but rising ATO scrutiny and complex compliance raise questions about their ongoing value. Are the benefits still worth the administrative burden?

13 ways to save money on your tax - legally

Thoughtful tax planning is a cornerstone of successful investing. This highlights 13 legal ways that you can reduce tax, preserve capital, and enhance long-term wealth across super, property, and shares.

Warren Buffett's final lesson

I’ve long seen Buffett as a flawed genius: a great investor though a man with shortcomings. With his final letter to Berkshire shareholders, I reflect on how my views of Buffett have changed and the legacy he leaves.

Latest Updates

Retirement

Why it’s time to ditch the retirement journey

Retirement isn’t a clean financial arc. Income shocks, health costs and family pressures hit at random, exposing the limits of age-based planning and the myth of a predictable “retirement journey".

Financial planning

How much does it really cost to raise a child?

With fertility rates at a record low, many say young people aren’t having kids because they’re too expensive. Turns out, it’s not that simple and there are likely other factors at play.

Exchange traded products

Passive ETF investors may be in for a rude shock

Passive ETFs have become wildly popular just as markets, especially the US, reach extreme valuations. For long-term investors, these ETFs make sense, though if you're investing in them to chase performance, look out below.

Shares

Bank reporting season scorecard November 2025

The Big Four banks shrugged off doomsayers with their recent results, posting low loan losses, solid margins, and rising dividends. It underscores their resilience, but lofty valuations mean it’s time to be selective. 

Investment strategies

The real winners from the AI rush

AI is booming, but like the 19th-century gold rush, the real profits may go to those supplying the tools and energy, not the companies at the centre of the rush.

Economy

Why economic forecasts are rarely right (but we still need them)

Economic experts, including the RBA, get plenty of forecasts wrong, but that doesn't make such forecasts worthless. The key isn't to predict perfectly – it's to understand the range of possibilities and plan accordingly.

Strategy

13 reflections on wealth and philanthropy

Wealth keeps growing, yet few ask “how much is enough?” or what their kids truly need. After 23 years in philanthropy, I’ve seen how unexamined wealth can limit impact, and why Australia needs a stronger giving culture.

Sponsors

Alliances

© 2025 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.