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Emerging Perspectives

Argentina – don’t cry; do watch closely

30 October 2019
Authors: Vivienne TabererPortfolio Manager, Victoria HarlingHead of Emerging Market Corporate Debt

The quick view

  • While largely expected, the election win by centre-left presidential candidate Alberto Fernandez was by a smaller margin than feared.
  • The more balanced result than feared has seen markets avoid any big knee-jerk reactions.
  • Some positive signs are emerging over the potential balance of power in congress.
  • However, many uncertainties remain and investors are generally waiting on the sidelines until further details emerge.
  • What’s vital to watch: how the peso fares, who Fernandez picks for his cabinet and how he engages with the IMF and bond holders.

Sunday’s presidential election saw Argentina’s left-of-centre opposition candidate Alberto Fernandez beat incumbent President Macri. This was widely expected following the primary election result (PASO) that rocked markets in August by stoking fears of a populist government taking over the reins from Macri’s market-friendly regime.

However, Macri’s Sunday loss was by a smaller margin than expected. Furthermore, with seats now being contested in the lower house of congress and the senate, early indications point to a more balanced congress than many had feared. This would have positive implications for the level of scrutiny and checks and balances on future policy-making.

Following Sunday’s result, Argentina’s central bank (BCRA) announced measures to strengthen capital controls, restricting individuals’ monthly US dollar purchases. This should take some pressure off the spot currency market while reducing the likelihood of BCRA needing to intervene in the foreign exchange market. However, it doesn’t tackle the issue of currency reserve erosion through withdrawals of US dollar deposits. How the strength of the peso evolves from here will be key for fixed income investors given its impact on Argentina’s ability to service its dollar-denominated debt.

How have markets reacted?

The more balanced result than feared has seen markets avoid any big knee-jerk reactions.

Investors – us included – are now watching carefully for clarity on how Fernandez will staff his new cabinet and how market-friendly (or not) his eventual policies will be. The nature of Fernandez’s future relationship with the IMF and existing investors in its sovereign bonds is a key area to watch.

We expect more clarity on market direction in coming days, as news begins to emerge over Fernandez’s transition team and his broad policy intentions ahead of the December inauguration.

While much uncertainty remains, we believe the worst-cast scenario would be for tradable debt to suffer a haircut in the region of 50-55% for the new government to be able to make debt stock sustainable (please see our August post for more details). But the range of possible outcomes is broad.

Sovereign bonds

Sovereign bonds ended Monday weaker after initially trading higher. While trading volumes seem to be light, it appears there are investors willing to buy and sell, creating a two-way market.

Given the muted nature of the recovery in bond prices since the large fall that followed the PASO result, we believe current market prices still reflect what we consider to be a worst-case scenario. Reflecting this view, we have added modestly to our Argentina exposure in our sovereign strategies at these distressed pricing levels.

Corporate bonds

While corporate bonds were trading flat to slightly higher in price on Monday, volumes here are also very light. That said, across the overall market many investors are waiting on the sidelines ahead of the US Federal Reserve’s meeting Wednesday, so we are not reading too much into this.

We continue to have conviction in our positioning in what we believe are fundamentally strong and well-run businesses and where we see a low probability of default. However, we continue to monitor developments closely.

 

Emerging market: These markets carry a higher risk of financial loss than more developed markets as they may have less developed legal, political, economic or other systems.

The value of investments, and any income generated from them, can fall as well as rise.

Vivienne Taberer
Vivienne Taberer Portfolio Manager
Victoria Harling
Victoria Harling Head of Emerging Market Corporate Debt

Additional Information:

This material is for informational purposes only and should not be construed as an offer, or solicitation of an offer, to buy or sell securities. All of the views expressed about the markets, securities or companies reflect the personal views of the individual fund manager (or team) named. While opinions stated are honestly held, they are not guarantees and should not be relied on. Investec Asset Management in the normal course of its activities as an international investment manager may already hold or intend to purchase or sell the stocks mentioned on behalf of its clients. The information or opinions provided should not be taken as specific advice on the merits of any investment decision. This content may contain statements about expected or anticipated future events and financial results that are forward-looking in nature and, as a result, are subject to certain risks and uncertainties, such as general economic, market and business conditions, new legislation and regulatory actions, competitive and general economic factors and conditions and the occurrence of unexpected events. Actual results may differ materially from those stated herein. All rights reserved. Issued by Investec Asset Management, issued October 2019.

The content of this page is intended for investment professionals only and should not be relied upon by anyone else

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