By: Colby Smith
Not long ago markets had a giant “sell” on Argentina. The currency was tumbling, inflation was spiralling and stocks were going nowhere, as concerns mounted over the country’s ability to resist the allure of its past populist policies.
But a late-April announcement from the central bank that it would no longer allow the peso to float freely within a designated band, combined with some more upbeat economic data, has prompted investors to scurry back. Many seem heartened, too, by signs that president Mauricio Macri may be able to see off a stern challenge from former leftist president and Peronist firebrand, Cristina Fernández de Kirchner, in October’s election.
Since mid-May, the peso has emerged as the best performing of emerging-market currencies, while the benchmark stock index has soared more than 40 per cent since the beginning of that month. Yields on the government’s short-term debt have also dropped from distressed levels.
“Sentiment has definitely shifted in a more positive way,” said Denise Simon, a portfolio manager at Lazard Asset Management. “We have seen some of the macroeconomic numbers turn around, inflation looks like it has peaked and the currency looks stable, which is all likely to help Macri.”
Still, she adds, “no one is getting carried away”.
Goldman Sachs agrees that inflation in Latin America’s third-biggest economy appears to be rolling over. While the annual rate rose to a record 57 per cent in May, the firm’s regional economist Alberto Ramos notes that the month-over-month increase was slower than the three preceding prints. By year end, he expects inflation to drop by 20 percentage points. Meanwhile, a measure of real gross domestic product climbed 0.8 per cent month-on-month in April, a sharp reversal from the 1.4 per cent month-on-month decline minted in March. The agricultural sector, which after a devastating drought in 2018 is set to return a record harvest this year, led much of the reversal. Given these metrics, “the economy appears to have bottomed out,” said Jon Baur, a portfolio manager at Eaton Vance, who has exposure to longer-dated Argentine dollar bonds. While Mr Baur cautioned that “people have made this call repeatedly over the last couple of years and Argentina always find a way to surprise negatively”, he sees other reasons to be optimistic. For one, he argues that the external environment has shifted in the country’s favour, following dovish moves from major central banks around the world. Add to that the fact that Argentina’s most important trading partner, Brazil, may soon see a lift from the passage of its vital pension reform, and the case for Argentina becomes easier to make, he said.
The central bank’s move on the peso was critical too, he added. When the rule-change was announced, some analysts feared it would open the door for Argentina to once again burn through its $64bn stock of foreign reserves with little effect on the peso — something the central bank grappled with for much of 2018. That would have drawn the ire of the IMF, which is bankrolling Argentina as part of a record $56bn bailout package. But so far the policy pivot has been a “success”, said Axel Christensen, chief investment strategist for Latin America and Iberia at BlackRock, which has recently increased its holdings of Argentine equities.
Investors also draw comfort from the changing contours of the presidential contest. Mr Macri recently announced a shift to the political centre with the selection of Miguel Angel Pichetto, the 68-year-old leader of the Peronist majority in the senate, as his running mate.
By broadening his electoral appeal, Mr Macri is hoping he can shore up his popularity, which has nosedived in the face of spiralling poverty rates and the stringent austerity measures that the government has put in place to rid the country of its financial imbalances.
The move came after Ms Fernández’s surprise announcement that she will run not as president, but as vice-president on a ticket led by her former, more moderate cabinet chief, Alberto Fernández.
“The political situation is clearer now, and Macri’s chances of winning have improved”, said Graham Stock, a partner at BlueBay Asset Management
in London. Moreover, with Ms Fernández relinquishing her claim on the presidency and shifting to the political centre, Mr Stock said: “The
worst-case scenario of a Cristina victory may not be as bad as it looked when she was 100 per cent on the left of the spectrum.”
Still, he sees a Fernández-Fernández ticket as dangerous, simply because the duo’s policy mix is not yet known. Jan Dehn, the head of research at Ashmore, a London-based investment manager, agrees. He snapped up Argentine assets during the most recent sell-off, but says a victory for Ms Fernández’s coalition would dramatically change his positive outlook.
“Peronism will suck the life out of Argentina and you will see a default”, warned Mr Dehn. “If the coalition with her wins, I would turn extremely bearish.”