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Argentina at the polls…again: top investors on what to expect

Argentina at the polls…again: top investors on what to expect

Argentina will return to the polls on November 22 to decide who will replace outgoing President Cristina Fernandez de Kirchner, after elections on October 25 failed to provide a decisive outcome

Voters will chose between Daniel Scioli, who is seen as Kirchner's successor, and the former mayor of Buenos Aires, Mauricio Macri, who is head of an opposition coalition. Scioli having won the first polling but not by a clear enough margin to claim an outright victory.

Commenting on the potential outcome, emerging market experts Denise Prime, who co-manages the GAM Star Emerging Market Rates fund and Tim Love, co-manager of the Julius Baer EF Emerging Equity fund, think the country would benefit from Macri winning a clear majority, as he would provide greater independence for institutions like the central bank.

‘While details of their respective economic plans are still emerging, Mr Macri would likely appoint Alfonso Prat-Gay, a well-respected former central bank governor, as his economy minister and undertake a number of much needed reforms,’ the pair said in an investor commentary.

‘Crucially, he would seek to rapidly resolve the conflict with “holdout” bond investors, a vituperative legal saga that has dragged on for over a decade. For a country bleeding foreign reserves, a resolution can’t come soon enough.’

Hard task ahead

Meanwhile, Tim Umberger, senior adviser at East Capital, thinks Argentina faces significant challenges whatever the outcome of the elections, as the economy shrank by around 3% last year.

‘The official ARS/USD rate of 9.5 versus the “blue rate” of 15, indicates that the currency is significantly overvalued, putting an additional drag on the economy whereby all neighbours including Brazil have depreciated significantly,’ he said.

‘The budget deficit is running at 7% due to subsidies (estimated at 5% of GDP) and is financed directly from the central bank, inevitably causing inflation. The central bank reserves are low and will, according to some estimates, be completely depleted early next year. The current account deficit is widening due to low soft commodity prices and problems in Brazil, and has turned negative in 2014.’

Even with the political uncertainty and monetary issues, there are still opportunities in the country from companies which have shown resilience against the economic problems, Umberger said. ‘Despite the fact that valuations are not necessarily very cheap right now, we found plenty of long-term opportunities across different sectors.'

'For example, banks where loans to GDP are at mere 15%; utilities with the potential tariffs liberalisation after being frozen for 10 years; real estate companies, which will finally get access to funding; and in particular, the companies from the “new economy” such as e-commerce, that are expected to do well regardless of the outcome.'

Meanwhile, Prime and Love are already positioning for a Macri victory and have added to their respective holdings to reflect this.

‘We’ve been buyers of American Depositary Receipts in Pampa Energia, Argentina’s largest electricity company, in anticipation that a Macri victory and pro-reform agenda should repeal the cap on domestic electricity costs.’

‘In debt markets, we have recently acquired a small exposure to a one-year supranational bond yielding over 80%, which we believe sufficiently compensates for devaluation risk,’ the managers said.

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