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ECONOMY | 20-10-2023 07:41

Here are the assets to watch ahead of Argentina’s presidential election

Investors in Argentine assets are bracing for losses ahead of Sunday’s presidential election, with uncertainty high as voters grapple with triple-digit inflation and economic gloom. Here are key assets to watch ahead of the vote.

Investors in Argentine assets are bracing for losses ahead of Sunday’s presidential election, with uncertainty high as voters grapple with triple-digit inflation and economic gloom.

Whoever comes out ahead — libertarian outsider Javier Milei, Economy Minister Sergio Massa or pro-business Patricia Bullrich — stands to inherit a slew of challenges. The country is on the brink of its sixth recession in a decade, the Central Bank is devoid of dollars and Argentines are suffering under the weight of inflation running at 138 percent.

All this makes it a difficult moment to trade Argentina, and many large funds have already fled the serial defaulter before major debt payments come due next year. And uncertainty could deepen if no candidate wins outright, resulting in a run-off vote in November.

“No scenario should be ruled out,” BancTrust analysts led by Ramiro Blazquez wrote in a note. “Nonetheless, our working assumption is that Milei will ultimately become president, either in the first or second round.”

The nation’s US$65 billion of sovereign bonds are trading deep in distress, with surging yields that signal a high risk of the country’s 10th default. And currency markets have been strangled by a web of capital controls, which also make local equities difficult for foreign investors to access.

Here are key assets to watch ahead of Sunday’s vote:

 

Sovereign bonds

Argentina’s sovereign bonds suffered a massive sell-off after Milei unexpectedly won 30 percent of the vote in August’s presidential primary. 

Since then, the government’s debt due in 2030 has handed holders losses of roughly 10 percent, according to data compiled by Bloomberg. That’s compared with an average five percent drop across emerging markets over the same period, the data show.

Investors still see room for prices to slide further — especially if Sunday’s vote leads to an outright Milei victory. The notes would also fall if the election leads to a run-off next month between Milei and Massa, according to Bruno Gennari, a strategist at KNG Securities. 

“If there is a Milei-Massa run-off in November, Argentinian bond prices could fall further,” Gennari wrote in a note to clients. “They have underperformed relative to other distressed credits due to lower expectations of Patricia Bullrich entering a second round and the approval of tax cuts in Congress.”

Here are some of the most liquid Argentine sovereign bonds: 

  • Argentina 2030
  • Argentina 2035
  • Argentina 2046

 

Corporate bonds 

The country’s economic malaise, restrictive capital controls and political uncertainty have also started to creep into Argentina’s corporate credit markets. Anxiety has already started to drag on this year’s rally in bonds from state-run oil driller YPF SA, causing notes due in 2025 to slide after touching the highest in three years in July.

“There is not a lot of appetite for corporates from foreign investors lately,” according to Paula La Greca, a corporate analyst at TPCG in Buenos Aires. “The reality is that if you compare YPF to other emerging-market bonds, they are more expensive, especially if you take into account the political uncertainty and the consensus view that macroeconomic conditions are going to worsen.”

  • YPF 2025
  • Pampa Energía 2026
  • MSU Energy 2025
  • Genneia 2027 
  • Aeropuertos Argentina 2031 
  • IRSA 2028 

 

Provincial bonds

A bright spot exists in debt from Argentina’s regional governments — especially secured bonds from Neuquén and Chubut and notes from Buenos Aires and Santa Fe provinces. 

The assets have become something of a haven for bondholders who want to invest in the country but avoid the risk of sovereign debt, according to Javier Casabal, a fixed income strategist at Buenos Aires brokerage Adcap.

“These assets are likely to remain expensive due to their safe-haven status, despite significant downsides,” Casabal wrote in a note Oct. 17.

  • Buenos Aires 2037
  • Provincia de Cordoba 2025
  • Provincia de Neuquén 2030
  • Buenos Aires 2027 

 

The peso

The country’s official exchange rate hovers at 350 pesos per dollar, though economists say it’s long overdue for further devaluation. Alberto Ramos, chief economist for Latin America at Goldman Sachs Group Inc, expects the currency to devalue as much as 50 percent after the elections. 

An Economy Ministry official said Wednesday that the government would keep the official exchange rate fixed at current levels until November 15.

The gap between the official rate and Argentina’s most commonly used parallel rate currently stands at more than 170 percent, while Argentines rushing to dollars pushed the black market rate, known as “dollar blue,” to more than 1,000 pesos per dollar on the streets of Buenos Aires earlier this month. 

  • Blue-chip swap
  • Official rate

 

Equities

Few, if any, foreign investors, will look for opportunities in Argentina’s local stock market due to the currency controls that still heavily restrict access. 

But the S&P Merval Index will still be closely watched as a gauge for how local investors are reacting to the election. The index touched its highest levels on record earlier this week as inflation surges and expectations build for another peso devaluation.

International investors are preparing for a sell-off in Argentine stocks. Traders yanked as much as US$6.6 million out of the US$55 million Global X MSCI Argentina ETF in the past week, the most since April 2021. 

  • YPF
  • Pampa Energía
  • MercadoLibre 
  • Globant 
  • Arcos Dorados Holdings 
  • Grupo Financiero Galicia
  • Banco Macro
  • Cresud SAICIF 

 

Cryptocurrencies

Argentina has some of the highest adoption rates of cryptocurrencies in the world as people look for ways to skirt capital controls. The online crypto market, which continues trading on the weekend, may give early signals of how markets will react to the results of Sunday’s vote. 

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by Kevin Simauchi & Scott Squires, Bloomberg

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