04/10/2019

Argentina: Monthly Report

Monthly Report 04/10/2019
Argentina: Monthly Report
A whole new world
 
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A peculiar political transition. Against all odds, Kirchnerism scored a landslide victory in the primaries causing Argentina to lose market access and triggering sharp capital outflows along with massive dollar deposit withdrawals. The result seems too hard to reverse even in a runoff but the election has not yet been formally defined, setting up a peculiar transition in which political incentives are misaligned and the degree of cooperation between the two main parties became the most powerful stabilizing factor.  

Clouds over the horizon. The latest data showed activity never rebounded ahead of the election. The change in conditions after the primaries outlined clear downside risks ahead of coming quarters, with several factors pointing at further sequential GDP declines.

Against a major challenge, with a limited toolkit. Shifts in the political arena shortened the horizon for monetary policy making the BCRA further lose its grip on expectations. On top of this, headwinds for the financial program feed the latent risk of significant monetary expansion in the end of the year, outlining a very challenging inflation outlook with significant upside risks.

Fiscal consolidation faces new challenges; just as Argentina loses market access. August fiscal data once again showed the government lowering the primary deficit on the back of some one-off revenues, while recent financial pressures confirmed Argentina’s debt profile has major vulnerabilities. Ahead of the future, every road seems to lead to a sovereign debt restructuring in 2020.

And the suggested trades are... Expecting better conditions for emerging markets, we suggest our Franklin Templeton SBS LATAM FI USD FCI fund to place an attractive bet on a selection of high credit quality Latin American assets without exposure to Argentine sovereign debt. Among sovereign dollar bonds, we favor PARY as we believe it is unlikely to be restructured and also like DICY, though its higher coupon makes it riskier. Among equities, we suggest TXAR, ALUA and LOMA as attractive bets on basic materials. Moreover, we see exposure to Vaca Muerta (YPF, TGS) as defensive and we like GGAL and BMA among banks.
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