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Source: WSJ

BUENOS AIRES—Argentina's bonds and stocks will likely add to last year's gains in early 2011, thanks to a favorable backdrop of investor appetite for emerging-market assets and expectations that Argentina and its top trading partners will log yet another year of solid economic growth.

The Central Bank of Argentina expects the economy to expand a respectable 3.5% to 6.5% this year, down from an estimated 9% in 2010, as the country continues to benefit from high grain prices and vibrant exports to Brazil and China.

Latin American Market Outlook

Strong economic growth and steps by President Cristina Fernández to signal her willingness and ability to pay the government's debts fueled a rally in the country's bonds in the second half of 2010 as investors hunting for yield amid rock bottom-interest rates in the developed world cast aside lingering doubts about Argentina's creditworthiness.

"We remain bullish on Argentine assets, as high liquidity continues to boost the search for yield and the odds for positive policy changes increase," Bank of America Merrill Lynch strategists wrote in a report.

Argentina's stock market should see gains in the first quarter.

Inflation-linked 2033 discount peso bonds surged 67% on the year to close at 187.50 pesos on Dec. 30, which sent their yield tumbling to 7.29%. The dollar-denominated Boden 2015, rose 18% to 388.25 pesos, to yield 8.27%.

Juan José Vázquez, a senior analyst at Buenos Aires-based Bull Market Brokers, likes U.S.-dollar-denominated government bonds. "Even though we don't expect much change in the nominal exchange rate in the first few months of the year. I would prefer to be positioned in U.S.-dollar bonds because peso bonds have already appreciated in a big way," he said.

The peso depreciated 4.5% against the U.S. dollar last year, ending 2010 at 3.9775 pesos thanks to the central bank's policy of gradually weakening the peso to favor exporters. Without its intervention the peso would have strengthened to 1.86 pesos amid heavy dollar inflows, President Fernández said in a speech Dec. 7.

The central bank has indicated that it will continue its managed float of the peso during 2011, buying $12.5 billion to bolster its foreign-exchange reserves and engineer a mild depreciation of the local currency.

"In Argentina, we expect some stability of the peso in the coming months. As a result, we favor peso bonds, particularly those linked to the Badlar" benchmark interest rate, Bank of America Merrill Lynch strategists said.

Argentina's stock market should also see gains in the first quarter after the Merval index rose nearly 52% in 2010 to close the year at a record high of 3523.59.

Banks were the big winners last year as they benefited from the revaluation of their government bond holdings. Grupo Financiero Galicia shares jumped 180%, mortgage lender Banco Hipotecario rose 117%, and shares of BBVA Banco Frances more than doubled in value.

Leonardo Bazzi, head of research at local brokerage Puente, thinks that banks have more room to run thanks to their government-bond holdings and growth in their lending business.

The energy sector also generated handsome returns for investors, especially oil and gas companies whose shares rallied following a pair of multi-billion dollar acquisitions in Argentina by Chinese oil companies and the discovery of what could be the first of many large deposits of unconventional natural gas.

Shares of the country's largest oil and gas company YPF SA rose 32%, with most of those gains logged in December after its massive gas discovery, while Petrobras Argentina SA jumped 84%.

"YPF shares are still trading at interesting levels" even after the rally, Bull Market Brokers' Mr. Vázquez said.

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