05/08/2019
Argentina: Monthly Report
A long journey ends, another begins
05/08/2019
Argentina: Monthly Report
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A long journey ends, another begins
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¿Policy continuity
or populist trap? The virtuous cycle of "FX
stability-disinflation-confidence" continued to favor the
government. The latest polls showed that Juntos por el Cambio and Frente
de Todos are in a dead heat, with only a slight lead for the
opposition. This final impulse marked the end of a long journey in which
the government rose from the ashes and is now head to head polarizing
against Kirchnerism. Now, another journey begins and in the end we will
finally see whether society is willing to give policy continuity a chance
or, in turn, falls back in the populist trap.
Growth beginning to
gain pace. Economic activity extended its recovery in May
consolidating the rebound that began in 1Q19, while June indicators
suggest that the expansion could be gaining some pace. The recession is
now clearly behind and, ahead of the election, conditions seem to be set
for an interesting expansion with a remarkable consumption boost.
Fine-tuning monetary
policy without risking FX stability. Exchange rate
stability continued to boost peso demand extending the disinflation
process into June and July. Despite healthier inflation prints, the BCRA
adjusted its monetary program amid signs of extreme monetary tightening.
After a challenging semester, inflation seems to be heading towards a
2.0% m/m cruise speed in the second half of the year.
Fiscal consolidation
receives unexpected help; the financing program reaps new victories. June
fiscal data showed the government fulfilling its quarterly target with
the help of some extraordinary factors, even as spending cuts remain
significant during an election year. Meanwhile, the financial program
reaped good results with roll-over rates rising to healthier levels and
some additional 2020 issuance.
And the suggested
trades are... Portfolio allocations should be exclusively
driven by expectations regarding the primary elections. Under a
technical draw we suggest high exposure to equities and local currency
bonds, simultaneously capturing the spread compression and the real peso
appreciation that would follow. On an intermediate scenario where
there is a moderate Kirchner win we see room for tactical bets on hard
currency sovereign bonds and moderate carry trades taking advantage of
exchange rate stability. Finally, under a clear Kirchner victory we
prefer a highly dollarized portfolio with zero exposure to sovereign
bonds.
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