Argentine election attracts risk investors to bet on long term

The presidential race of Argentina is prompting some risk-taking investors to place bets despite the slim chance that a new government will manage to lift the second-largest economy out of South America of its deep crisis.

While most traders wait to make decisions, anxious about the election and unsure about the candidate who won the primary, libertarian Javier Milei, some bold bondholders are moving.

His bet is that it is likely that a candidate closer to the markets will win in the October 22 elections, be it Milei, Patricia Bullrich, his main rival in the conservative space, or the Minister of Economy Sergio Massa, of the Peronist coalition of ruling center-left.

“Two-thirds of the country is voting for pretty significant fiscal consolidation, which, as a bond investor, we’re obviously very interested in,” said Christine Reed, a portfolio manager at New York-based global investment firm Ninety One.

Reed said the investment company had increased its allocation to Argentina since Milei’s surprise first-place finish in August’s open primaries, although he admitted the risk was high given the country’s history of defaults – the ninth in 2020. – and falls in bond prices.

“There has been a lot of pain in investing in Argentina in the last decade”Reed said. “People who are still in business probably lost money at some point or another.”

Milei, an economist and national congressman, wants to make deep spending cuts, eliminate capital controls and eventually dollarize the economy.

The decisions, in theory, should be positive for markets, but could be difficult to make in an economy besieged by triple-digit inflation, negative foreign reserves, rising poverty and a plummeting currency. An agreement for US$44 billion with the International Monetary Fund (IMF) adds to the instability.

Bullrich, who was a minister during the market-friendly presidency of Mauricio Macri between 2015 and 2019, also promises to cut the fiscal deficit and monetary issuance.

Massa, who represents a more moderate sector of the ruling coalition, promised to bring the deficit to zero in 2024, although he appealed to the spending spigot recently to improve his electoral chances.

Rb Citrone, founder of US-based hedge fund Discovery Capital Management, said Argentina presents one of the best possibilities in emerging markets

“They are supporting someone who has a very radical vision in terms of a real free market and a smaller government,” said of Milei. “From an economic perspective, these are very liberal ideas, so I think it’s going to be a generational change.”

Unpopular populism

A key takeaway for investors from the August primaries was the perceived weakness of Vice President Cristina Fernández de Kirchner, a center-left populist and two-time Argentine president between 2007 and 2015, who has long clashed with investors.

Fernández de Kirchner, who established currency controls and presided over a sovereign debt default during one of her terms, has taken a minor role in the electoral race.

After organizing a trip for investors to Buenos Aires, BancTrust & Co analysts said the main takeaway from meetings was “confirmation that the focus of policy debate has shifted toward a market-friendly framework.”

“We also found a consensus that Kirchnerism would progressively abandon the center of the political stage no matter who wins the elections,” they said in a note.

Depressed prices

The prices of Argentina’s bonds against the dollar are traded between 20 and 30 cents, much lower than countries currently in default, such as Ghana and Sri Lanka, which are traded around 40 cents.

The low values ​​offer another reason for optimism about Argentine debt, said Thomas Haugaard, a portfolio manager of emerging-market hard-currency debt at Janus Henderson Investments in Copenhagen.

“We have a slight overweight in Argentina, but it is probably more of a valuation argument at the moment than a very clear baseline scenario,” Haugaard said. “I think most investors are struggling a little bit to understand what the base case is.”

There is also lingering concern about a possible Milei administration, given that his party would have to face a hostile and divided Congress that would try to obstruct any proposed reforms.

Morgan Stanley recently said it was not yet time to be bullish on Argentina, despite a recent drop in bond prices, although a “The path towards an optimistic scenario remains.”

Armando Armenta, an analyst for Latin American fixed income and currency markets at AllianceBernstein in New York, said it was a mixed scenario.

“The performance of Milei and Bullrich as signals of a demand for change from current unsustainable policies should be welcomed by investors,” said.

“However, Milei’s plans and his ability to implement them if he wins are still clear, moderating the positive impact of the expected outcome.”

Source: Reuters