08/04/2020

Time to wipe the slate clean

Monthly Report 08/04/2020
Argentina: Monthly Report
Time to wipe the slate clean
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The Corona-crisis changed the global landscape. The Coronavirus sent the world economy spiraling into recession just as developed markets were beginning to rebound and trade tensions eased. The government is obviously focused on tackling the urgency, but once the crisis is over authorities will have to deal with all the challenges Argentina was facing before the Coronavirus outbreak. Unfortunately, this shock will only make the road ahead even harder.

A grim outlook. Economic activity continued to show stagnation during January and February, though this abruptly changed in March. Supply is collapsing as companies cannot either produce or sell but still must cover their fixed costs, while demand will have to adjust once again through lower consumption and investment. Overall, we expect activity to bottom this month and gradually normalize afterwards.

Monetary financing will add some pressure. The BCRA is facing a major challenge as it must simultaneously ramp up financing to the Treasury and ease monetary conditions to prevent a disruption in the chain of payments. This adds significant pressure to the inflation outlook, though the Central Bank is also aided by the massive cooling of demand and the little room for wage increases in this complex context for corporates.

Sustainability severely damaged ahead of debt talks. Argentina is moving towards a new equilibrium with a higher primary deficit and less room to accumulate reserves, weakening the two pillars behind the sustainability view the government was proposing. This severely damaged the recovery values that investors could envisage prior to the Corona-crisis and this means that authorities will have to rethink their strategy ahead of the external debt restructuring process 

And the suggested trades are... Argentine assets were severely hit, leaving attractive opportunities in some areas. For dollar positioning, we like Globals in the 2021-26 range and believe it is time to place bets on corporate debt through our SBS Estrategia FCI. Moreover, we see a very attractive entry point to add exposure to equities through our SBS Acciones Argentina FCI but also see several factors that suggest investors should be underweight local currency bonds.
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