Volatility returns to markets as election jitters take their toll
Concerns contribute to peso becoming the
world’s worst currency and undermined bond
returns, amid speculation that next month’s
crucial PASO primary vote may show strong
support for Fernández-Fernández ticket.
Argentine markets had finally seemed to find
their footing, stabilising after months of turmoil had sent the peso tumbling and borrowing costs soaring. But the past few days show investor
angst is coming back.
The concern that has contributed to peso becoming
the world’s worst currency and undermined bond
returns stems from speculation that next month’s
crucial PASO primary vote may show strong support
for opposition candidates ahead of October’s presidential ballot.
Investors are hardly thrilled with the performance
of President Mauricio Macri since he took over December 2015, but the prospect of the business-friendly centre-right candidate losing re-election has them
terrified. The fear is a return to the policies of the
previous administration, when then-president Cristina Fernández de Kirchner imposed currency controls, intervened heavily in the economy and frequently feuded with investors at the expense of
growth and business confidence.
There’s no outright panic at
this point. Investors expect the
primary vote – which is compulsory for Argentines – will show
Fernández de Kirchner’s coalition with a small edge over
Macri’s, though one that could
easily be overcome after the
number of candidates from
smaller parties is whittled
down. But money managers are
starting to turn defensive in case results signal a bigger-thanexpected advantage for Alberto
Fernández, the presidential
candidate heading the Frente
de Todos ticket.
“Investors might just take profits prior to the primaries,” said
Edwin Gutierrez, the Londonbased head of emerging-market
sovereign debt at Aberdeen Asset Management. “They have
made good money on the trade,
and liquidity is going to get worse as we get closer to the real elections.”
While Argentina’s overseas
bonds edged higher Friday, holders had lost 2.5 percent over the
past five days even as most notes
from developing countries advanced, according to data from
JPMorgan Chase & Co. The peso dropped 2.2 percent in that
span, making it the worst performing emerging-market currency tracked by Bloomberg.
LEVEL OF SUPPORT
The major political coalitions have already picked their
candidates for the presidential
vote, but which party primary
voters choose to participate in
will give an idea of the level of
support they can expect.
For the August 11 primary,
Fernández is favoured over
Macri for the overall vote tally,
but a lead of five percentage
points or more would be taken
as a negative sign by investors,
according to Carolina Gialdi, a
senior fixed-income strategist
at BTG Pactual Argentina in
Further complicating the picture is that investor access to
reliable polling data has been
limited this year as more local
firms choose to restrict access.
Investors “may have been
overly optimistic” before recently re-evaluating their stances, Gialdi said in an interview.
After stock returns that exceeded 30 percent this year and the
world’s best carry trade, it might
make sense to lock in profits.
The risks are a policy reversal
which at its most extreme could
even raise the prospect of a debt
restructuring in the next two to
three years, according to
Moody’s Investors Service.
While that’s a worst-case scenaPRESIDENCIA DE LA NACION
rio, Argentina is still vulnerable
after getting a US$56-billion
loan from the International Monetary Fund last year in an effort
to stabilise government finances and boost investor confidence.
Macri’s re-election bid may be
aided by signs of improving economic data and his success at
stabilising the currency earlier
this year after the peso lost
about half its value in 2018. Inflation cooled for a third straight
month in June, and the economy
grew 2.6 percent in May thanks
to a boost from the harvest, according to data published
Thursday. It’s the second consecutive monthly increase and
supports the IMF’s view that
Argentina likely came out of
recession in the second quarter.
The president’s image is also
climbing ahead of the vote. A
July poll by local consulting firm
Elypsis – the only one to predict
in 2015 that the elections would
be pushed to a run-off round –
found a gain in his voter support
brought him to a statistical dead
heat with Alberto Fernández in
the elections’ first round on October 27. More than three-quarters of voters are split between
the two frontrunners, illustrating the degree of polarisation.
For those willing to stomach
the risk, valuations remain attractive in peso assets as policy
continuity should lead to even
more tightening in peso bond
spreads, according to Morgan
Stanley analysts. They recommended floating-rate bonds for
The peso “could continue in a
virtuous circle as long as the
global backdrop remains as
supportive as now for high-carry currencies,” strategists led
by James Lord wrote in a note
Thursday. “Markets should feel
But after the carry trade – buying Argentine peso-denominated bonds with borrowed dollars – returned 14 percent this
year, the most among major
emerging markets, lots of investors seem to think now may be
time to take a step back.
“Having enjoyed a very strong
performance and facing increased political risk as we approach
the primaries, it seems reasonable for investors to take some
profits at these levels,” BBVA
analysts led by William Snead
wrote in a note.