Investors and analysts who wrongly predicted President Mauricio Macri would win the key August primary now say a victory by his challenger on Sunday is a foregone conclusion. The only question left, they say, is how big a margin he will score – and whether he can afford to tone down the populist campaign-trail rhetoric that pointed him to victory.
Money managers -– and virtually every pollster and analyst – guessed wrong when Alberto Fernández upended incumbent Macri in a primary vote that all but guaranteed the challenger a victory this weekend. Stocks, bonds and the peso plunged as investors mourned the campaign of market-darling Macri and worried about a return to Peronism and the risk of Argentina’s ninth default.
As the final vote approaches, they won’t need to hit the panic button again, said Carolina Gialdi, a senior fixed-income strategist at BTG Pactual in Buenos Aires. The odds are well in Fernández’s favour, and his victory would still leave plenty of time for markets to digest future policies before he enters office in December.
“Once officially elected, Fernández can start to make definitions,” she said in an interview. “He can announce his cabinet, he can announce measures, he could meet with investors.”
Investors have been preparing for this outcome since August, so bond prices, stocks and the peso market have his victory “fully priced in already,” she said.
Argentines will also be casting ballots for almost half of the nation’s congressional seats, along with some key gubernatorial races -– including the province of Buenos Aires. Here are a few of the scenarios economists, strategists and investors are considering in the days leading before the October 27 elections:
Fernandez and his running-mate, former president Cristina Fernández de Kirchner, beat Macri by 16 points by taking almost 48 percent of the vote in the compulsory August PASO primaries. An expected speech on Sunday evening will also be closely watched for any calming signs to investors that could help prices to rally.
Sovereign bond prices, which are in the mid-40 cent range, would probably fall if Fernández’s margin is much wider than expected “because the mandate of populism he would have would be stronger and the Ccongress composition would be more left wing,” Gialdi said.
TPCG Chief Economist Juan Manuel Pazos sees the bonds nearing 40 cents if Fernández sweeps the competition, with prices dropping even lower if a Peronist win is large enough to align both houses with Fernández’s party.
A victory in the election this month would leave investors in a holding pattern as they await clarity on his policies and a the appointment of a cabinet, said Adrian Yarde Buller, chief economist at Buenos Aires-based broker Grupo SBS. A more market-friendly tone once he’s off the campaign trail would support a recovery in Argentine assets.
“Cabinet members should be revealed within days,” Buller said. “We expect Fernández to quickly give some signs regarding fiscal and monetary policy so as to stabilise the economy, moderate reserves loss and try to reclaim a nominal anchor.”
It’s possible, though unlikely, that Fernández fails to secure at least 45 percent of the vote, or 40 percent with a 10-point margin over the next runner-up, forcing Argentines to return to polling centres on November 24.
“Even if he manages to get to the second round it is still unlikely he has chances in the run-off,” BTG Pactual’s Gialdi said. “The market would react positively, though contained by the fact that he still may not even win.”
A run-off could drive the peso to between 50 and 55 per dollar, said Win Thin, global head of currency strategy at Brown Brothers Harriman & Co. in New York. In that case, he expects a “a knee-jerk release” in which assets gain temporarily, he said.
Others say a run-off could flag a change in voter sentiment big enough to knock Fernández out of the running. TPCG’s Pazos assigned that a slim probability, but said that could mean Macri wins a second term, sparking a short bond relief rally into the high-50 cent range. Any gains would be limited by an impending default, he said.
“If we go to a run-off, the spreads will likely break 2,000, but they won’t get it to 1,500,” he said in an interview. “It will be somewhere in the 1,700 range.”
Macri would shock markets by winning outright in the October election. Assets would broadly rally, from equities to the currency, said Benito Berber, chief economist for Latin America at Natixis in New York. Thin, meantime, forecast the peso to rally past 50 per dollar if Macri wins another four years.
“Even if Macri wins, I don’t see bonds going higher than 60,” said Walter Stoepplewerth, chief investment officer at Portfolio Personal Inversiones in Buenos Aires. “That’s because the next government will be inheriting a difficult situation in terms of debt amortization, inflation, and growth.”