We are into a new year and there are renewed expectations and hopes for better things to come. For those of us who invest in Argentina, however, it will not be an easy year to get through.
When deciding to make an investment, analysis must be carried out beforehand – what kind, how deep, what variables to look at, etc. In short, what events to watch out for in order to obtain the desired result.
It’s best to analyse what happened in 2022 in order to apply strategies that yielded good results for those who choose to place their savings.
Undoubtedly, inflation was the prevailing theme around the world: the United States, the Eurozone, Japan, China, Brazil and other Latin American countries produced consumer price indices that had not been seen in recent economic history. A separate issue is Argentina, which at times has flirted with a hyperinflationary past.
In the United States, the world's leading economy, the outlook of economic recession is not clear; although the first half of 2022 showed some contraction, the performance was not repeated in the second part of the year, and this was reflected in the labour market and the PMI index.
In the first, special attention should be paid to the unemployment benefit claims – i.e. the number of people filing the documentation to obtain the benefit for the first time, which as of August produced 18 weeks with a better performance than the market anticipated. The second concept – the Purchasing Managers' Index (PMI) – is an economic indicator that surveys purchasing managers at manufacturing companies: it fell in the first months but rebounded in the third quarter and then fell in the fourth quarter.
The US Federal Reserve is constantly seeking to converge on a two percent inflation rate, using the benchmark interest rate to do so, yet is still not achieving the desired results. At the last Fed meeting, the consensus on the benchmark rate was that there would be no cuts during 2023 and that the two percent inflation target should be reached by 2024. So, we can expect further increases but of a smaller magnitude this year.
Moving onto the Eurozone, the region has not yet managed to fully reverse the effects of the Covid pandemic and has started to suffer the onslaught of the Russia-Ukraine war. Whether it was printing money or increases in fuel and commodity prices, the consumer price index reached 9.2 percent in 2022.
China keeps reminding us that Covid and its aftermath may take a long time to abate. The country tightens and relaxes its policies regarding the management of the epidemic and this has an impact on global aggregate supply. The opposite performance was shown by inflation, which declined year-on-year to 1.6 percent from 2.8 percent.
Let us now look at our trading partner, Brazil, which changed government at the start of the year, and its stock market. In the first days of this month, the Bovespa index of the main Brazilian companies fell three percent and the currency depreciated almost four percent; currently, the trend is being reversed: the Bovespa has witnessed positive days and the real has appreciated five percent compared to the beginning of the year. During 2022, inflationary performance went against the tide: Brazil had months of deflation to end the year with prices up 5.9 percent year-on-year.
First conclusion: we need to be aware of the global context when making investment decisions. Having a global vision helps us understand that there are economic problems that transcend borders and the mechanisms used to solve them have consequences in different geographies.
Let us leave the international level and look at the local context. Argentina ended 2022 with a consumer price index whose year-on-year variation was 94.8 percent. As I mentioned earlier, it reminded us of times gone by when double-digit fluctuations were commonplace. Additionally, the year was conditioned by the commitments with the International Monetary Fund, the non-accumulation of Central Bank reserves, the pace of the devaluation of the official exchange rate (the crawling peg) and the differential exchange rates for export activities.
The challenges for 2023 revolve around the upcoming presidential elections and the uncertainty that this democratic act generates in society as a whole; on the economic front, inflation and the accumulation of reserves will remain on the table, as well as the management of public debt in pesos.
Second conclusion: the domestic situation could improve or worsen due to the impact of the international environment; we are not "disconnected" from the outside world.
Nevertheless, it is possible to invest and find the right opportunities for each investor profile. If investors believe that inflation will continue to be the theme this year, they will find some peace of mind in assets whose issuers do not depend on financing (because if interest rates continue to rise, credit becomes more expensive) and in instruments that index the invested capital to indices that accompany the increase in the price level; if their expectations are based on a reactivation of economies, they will look for assets linked to industrial production, manufacturing and mass consumption. Meanwhile, investors seeking to dollarise their portfolios will find options in issues by private companies whose core business generates hard currency revenues and in issues of domestic government securities.
Finally, let us not forget that, being an election year, there will be an electoral trade – i.e. an investment opportunity for those betting on a change of political colour.
The stakes are high and investors are on the lookout. Welcome to 2023.
* Yanina Skiba is Commercial Team Leader at Liebre Capital.
by Yanina Skiba*