Argentina: Monthly Report

Argentina: Monthly Report

A long journey ends, another begins

¿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.