By James Attwood
Oct. 22 (Bloomberg) -- Argentina's government is likely to sell stakes now owned by the country's pension funds once it nationalizes the retirement system and Morgan Stanley may remove the country from the emerging-markets index, fund managers said.
``Once the government gets hold of all the pension funds' assets, then they will sell all remaining equity and use any available cash to buy their own debt,'' said Nicholas Field, who helps oversee about $18 billion in emerging-market equities at Schroders Plc.
Schroders Investment Management Ltd, a unit of Schroders Plc., owned 3.8 million American depositary receipts of Telecom Argentina SA, the second-largest telephone company, as of June 30, Bloomberg data showed.
Telecom Argentina lost a third of its value, leading a 17 percent plunge in the main stock index as of 2:28 p.m. New York time, after President Cristina Fernandez de Kirchner announced plans yesterday to seize $29 billion of private pension funds.
Kirchner's decision to take control of the private pension funds, known as AFJPs, has undermined investor confidence that was already faltering as prices on Argentina's commodity exports tumbled and a five-year-old economic expansion began to sputter.
Argentina's Merval index has fallen 29 percent this week, and Telecom has dropped by half, in the biggest selloff since 1990. Dollar bond yields topped 30 percent on speculation the planned pension takeover is a bid to stave off the country's second default this decade.
Field declined to comment on whether Schroders is selling Argentine stocks or plans to reduce the country's ``underweight'' position in its Latin American fund. Schroders owns 4.3 percent of Telecom Argentina's outstanding ADRs, Bloomberg data showed.
MSCI Index
The retirement system, set up in 1994 to help bolster capital markets, owns about 27 percent of shares available for public trading in Argentina, data compiled by pension funds show. The AFJPs, as the pension funds are known, own 23 percent of Telecom, according to Raymond James & Associates Inc.
MSCI, which keeps stock indexes used by investors in 22 emerging markets, said in June it would consider dropping Argentina from the emerging markets status, demoting it to ``frontier'' stock market, unless the country lifts capital controls that require foreigners to deposit 30 percent of their investments with the central bank.
The MSCI is likely to proceed with Argentina's demotion amid increasing market intervention, underscored by the planned pension fund takeover, said Bill Rudman, who helps manage $3 billion of emerging-market equity at WestLB Mellon Asset Management in London. WestLB Mellon probably will follow suit, cutting its current ``neutral'' allocation to Argentine stocks, Rudman said in an interview yesterday.
Market size and ``accessibility'' are taken into account when deciding on classifications, Dimitris Melas, Executive Director of MSCI Barra, said by phone yesterday, declining to elaborate on Argentina's case.
Tenaris Switch
Tenaris SA, which accounts for 69 percent of the MSCI Argentina country index, will switch to the MSCI Italian index starting next month as trading volume increases in Milan and shrinks in Buenos Aires, MSCI said in a statement last month.
``The rest of the stocks are tiny, illiquid and will be moving to `frontier' market probably in the New Year anyway,'' Field said. ``So when you add all that up why would anyone buy Argentine equity.''
Amado Boudou, the head of Argentina's social security administration, said yesterday the government will keep the same investment mix for the AFJPs, with 60 percent in bonds and 10 percent in stocks.
To contact the reporters on this story: James Attwood in Santiago at jattwood3@bloomberg.net
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