Argentina Is Unlikely Home of the Best Bond in Emerging Markets

(Bloomberg) -- With Argentine markets in meltdown as investors look ahead to an all-but-certain election loss for President Mauricio Macri, one bond stands out as a surprise winner amid the carnage.

A convertible note from MercadoLibre Inc., the Buenos Aires-based e-commerce company with operations across Latin America, has trounced its peers with a 72% return this year. That’s the best performance in all of emerging markets.

While notes from companies such as oil producer YPF SA and phone carrier Telecom Argentina SA tanked last month, MercadoLibre has avoided the worst of Argentina’s mess by relying on its home country for less than a quarter of its sales, while getting a boost from paying many of its workers in rapidly depreciating pesos. Analysts are also encouraged by the company’s plan to grow its business processing payments for other retailers, believing it could make MercadoLibre the dominant player in the region for years to come.

“MercadoLibre has become recognized by investors as one of the best ways to play fintech in Latin America,” said Marvin Fong, an equity strategist at BTIG in New York who has a neutral rating on the shares. “They are kind of following the playbook that Alibaba blazed with Alipay.”

Of course most of the gains in the convertible note are linked to the company’s stock performance; MercadoLibre’s New York-listed shares have more than doubled this year.

MercadoLibre hasn’t escaped entirely unscathed from the turmoil in Argentina, which was triggered by a primary vote last month that signaled the leftist opposition is likely to take over the presidency from the pro-business Macri. On Aug. 12, the day after the vote, the stock dropped the most in eight months and is now down 15% from the record close it reached before the ballot. The bond is more than 10% off its peak price.

Chief Executive Officer Marcos Galperin had been vocal in his support for Macri before the primary, but made a quick pivot once it became clear his preferred candidate was unlikely to win. He became the first Argentine CEO to meet with opposition contender Alberto Fernandez in the aftermath of the vote.

“My stance in the campaign was public and clear, and the fact that they received me and listened to me to discuss the country going forward was very positive,” Galperin said.

Of MercadoLibre’s 8,500 employees, about 4,200, including top management roles, are based in Buenos Aires, according to a spokeswoman. She declined to comment on cost savings from the 33% depreciation in the peso this year, the worst performance in the world.

“While Argentina represents 21% of MELI’s revenue, the country represents a higher percentage of its costs,” said Julie Chariell, an analyst at Bloomberg Intelligence. “In fintech, where the company is focused this year, over 50% of costs are in Argentina.”

To contact the reporters on this story: Justin Villamil in Mexico City at jvillamil18@bloomberg.net;Pablo Gonzalez in Buenos Aires at pgonzalez49@bloomberg.net

To contact the editors responsible for this story: Julia Leite at jleite3@bloomberg.net, ;Nikolaj Gammeltoft at ngammeltoft@bloomberg.net, Brendan Walsh, Boris Korby

©2019 Bloomberg L.P.