04/12/2019

The time has come

Monthly Report 04/12/2019
The time has come
 
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Still waiting for the economic team. With much less volatility, December will mark the end of a long transition that forced authorities to extreme capital controls to contain peso depreciation and safeguard reserves. As of next week, a new economic team will face the challenge of announcing a program that can regain confidence by correcting persisting vulnerabilities while building upon some of the accomplishments from the current administration.  

No signs of recovery. The latest indicators showed economic activity suffered the financial turmoil unleashed after the August primaries. Ahead of coming quarters, we expect activity to remain depressed while aggregate demand would continue to show weakness.

A delicate monetary equilibrium. The monetary equilibrium will turn even more challenging in 2020, as inflation dynamics will highly depend upon money printing money to finance the Treasury. High inflation levels and peso demand in multi-year lows are both major risks that should not be underestimated.

The fiscal front will require creativity, while financing needs will add pressure. 2020 fiscal dynamics will pose important challenges for the next administration, demanding policies that can extend the 2018 consolidation without assuming significant political costs. In the meantime, the first half of 2020 will be very demanding in terms of debt services, making a local law restructuring in the summer very likely.

And the suggested trades are... Among hard currency sovereign bonds, we continue to prefer PARY and DICY, while we also like A2E3 and A2E8 among Globals. In the local currency space, sovereign inflation linkers (A2M2 and TC21) and CABA floaters (BCD22) seem attractive. Finally, we believe the time is right to moderately increase exposure to equities, though we prefer to do so through our SBS Acciones Argentina FCI amid high uncertainty around macro and sectorial policies from the next administration.
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