15/07/2019

Argentina: Monthly Report

Politically uncertain until the last day 15/07/2019

Argentina: Monthly Report

 

Politically uncertain until the last day

 

 

 

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Polarization leaves third parties out of contest. The two main political forces moved closer to the center leaving third parties out of contest and shaping up a scenario of extreme polarization. In the meantime, FX stability boosted the government and polls show the match is now practically tied ahead of the primaries. During the following month, better external conditions and BCRA’s firepower should be enough to keep the FX market under control and favor the government in subsequent polls, though political uncertainty will probably last until the very end.  

Economic activity finally takes a turn. Activity figures confirmed the economy bottomed in February and performed well during both April and May. The outlook appears to have improved amid FX stability and lower inflation, anticipating modest growth ahead of the election.

Exchange rate stability reinforces the disinflation path. The latest changes to the FX intervention rule alleviated markets. In turn, this helped stabilize peso demand decelerating inflation and feeding a recovery for both confidence and expectations. Ahead of coming months, low exchange rate volatility and stable regulated prices should help the disinflation effort.

The fiscal consolidation moves forward and the financing outlook improves. May’s fiscal balance once again reflected the government’s commitment to spending reduction. However, it also showed revenues remain under pressure and could compromise this year’s fiscal targets. Meanwhile, improved local and external conditions allowed the financing program to show some positive results in June.

And the suggested trades are... To capture positive external conditions without exposing to Argentina's political risk we suggest our Franklin Templeton SBS Latam FI USD FCI. Instead, those betting in favor of policy continuity at the local level should take a look at our Franklin Templeton SBS Argentina FI USD FCI. Regarding local currency positioning, we see value in short end inflation linkers (A2M2/TC20) amid their total return outlook and ability to profit from a decline in real rates, while those aiming at lower interest rate risk will find our SBS Pesos Plus FCI very valuable. Among equities, the recent shift in market sentiment outlines a perfect moment for banks (GGAL and SUPV), while from a fundamental standpoint utilities (TGS and PAMP) and oil & gas (YPF) are attractive sectors.

 

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