Argentine stocks attract hedge funds amid high inflation and political change

foreign hedge funds have been taking advantage of the low values ​​of Argentine shares, taking into account a potential change of political party in the coming elections and a raised inflationdriving the country’s benchmark index to an all-time high.

Argentina’s S&P Merval index has more than doubled in the first six months of the year in dollar terms and reached its highest level since the start of 2018 in recent days, when it hit an all-time high in pesos.

Approval ratings for the ruling Peronist alliance have been hit by a crecent crisis of cost of living in Argentinaas the rise of opposition candidates from the centre-right and right in polls for the October elections have raised hopes that the next president will be more market-friendly.

“The current state of the economy is very bad. A hope of change means that the prospects may be better than the current scenario and therefore some people will try to invest before that change. said Pablo Riveroll, director of Latam equities for Schroders.

Center-left President Alberto Fernández is not running for re-election and the ruling coalition has chosen Economy Minister Sergio Massa as its candidate.

The Global X MSCI Argentina ETF posted revenues of $5.5 million in the last week to June 28, the highest in more than four months, while assets under management more than doubled to nearly $65 million in compared to the same period last year, according to data from Refinitiv Lipper.

However, investors warn that the rally in the benchmark stock index is unlikely to last in the long term, as the new government that takes office in December will face the daunting task of pulling Argentina out of the country’s worst economic crisis in decades.

The second largest economy in South America struggles against annual inflation above 100% and a fall in central bank reserves, forcing the government to apply strict capital controls to support a rapidly depreciating currency.

“The situation is almost a perfect storm. If inflation goes up, if the currency devalues, if you can’t get your currency out of the country because of currency controls, you put it in local stocks.”said Ashish Chugh, portfolio manager for global emerging markets equities at Loomis Sayles, which invests in Argentine stocks.

Stocks are also getting a boost thanks to the ability of certain companies to pass on price increases to consumers.

Argentina, which has a history of debt default, is trying to renegotiate its $44 billion loan program with the International Monetary Fund after a historic drought hit exports of key commodities like corn and soybeans and hurt the reservations.

Investors believe that the main priority of the next government should be the fight against inflation and the relaxation of capital controls that support the official exchange rate.

“Long-term (investors) don’t get involved because there’s no clarity on how Argentina will get to the other side smoothly and who will get it there,” Chugh said.

Fountain. Reuters