30 Oct 2019
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.
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 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.
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.