Entering a critical phase

Monthly Report 01/11/2019

Entering a critical phase
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Policy reversal confirmed in October. The general election confirmed the expected victory for the opposition but showed a surprisingly narrow margin relative to the primaries and an excessive dependence on the Province of Buenos Aires, perhaps taking away degrees of freedom from President-elect Alberto Fernández. Negotiations for an orderly transition began immediately after the election, although volatility should persist as we wait for signs regarding future economic policy.  

A very long recession is about to turn longer. The economy stagnated ahead of the primaries and the latest indicators turned from pointing at a rebound to anticipating a decline. Ahead of coming quarters, we expect activity to resume its decay as several factors should weigh on the outlook including a collapse of real wages, tighter financial conditions and a still contractive fiscal policy.

Time to move with extreme care. In a very challenging context, the government will probably have to turn the printing presses to close the financing gap just as expectations have de-anchored and money demand fell to multi-year lows, risking significant inflation acceleration.

The fiscal outlook weakens while the liquidity crisis deepens. The government tightly met its 3Q19 fiscal target on the back of extraordinary revenues, while September data showed further fiscal deterioration that could worsen if measures are not taken by 2020. Meanwhile, debt maturities continue to weigh and liquidity is scarce, although it should be enough to restructure debt without having to default.

And the suggested trades are... The global outlook continues to favor bets on our fixed income Latin America fund Franklin Templeton SBS LATAM FI USD FCI. In the sovereign dollar curve, we continue to like PARY and DICY over Globals while AO20 seems attractive in the domestic law curve. Looking past the fixed income space, we believe it is the right time to gradually augment exposure to equities through our SBS Acciones Argentina FCI. 
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