08/05/2020

Time to come up with a new plan

Monthy Report 08/05/2020
Argentina: Monthly Report
Time to come up with a new plan
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The economic strategy needs to be revised. The Coronavirus crisis caused severe economic damage, creating further complications for an economic strategy that was not working even before the crash. Imbalances are sizable and there are evident signs of stress: the BCRA is selling FX during the soybean harvest, monetary aggregates are growing at a great pace, activity is quickly deteriorating and the initial restructuring offer did not seduce creditors. Clearly, authorities will have to come up with a new plan or adjust the current one to make it viable.

Navigating through a storm without a compass. Economic activity is going through one of the largest contractions in Argentina’s modern history. The outlook is not very encouraging as there is no room for anti-cyclical policies. Thus, the confinement should have deeper consequences than in other countries and the recovery would be slower. We expect some normalization as of May and a partial recovery during 2H20, though at a very gradual pace and far from reaching pre-crisis levels.

Declining inflation, rising expectations. The deep recession has led to a sharp inflation deceleration in the short term, as it cooled down both demand-side (consumption) and supply-side (wages) inflation pressures. However, the sizeable monetary expansion weakened expectations, anticipating a strong acceleration once the economy normalizes.

With the fiscal position under heavy fire, the government launched its first restructuring offer. Tax revenues plummeted while the government announces stimulus measures aimed at the most vulnerable, a combo that puts fiscal accounts under heavy fire. In this context, the government is trying to restructure debt and avoid a default. 

And the suggested trades are... We remain defensive as both external and domestic uncertainty continue to be high. Regarding dollar positioning, we suggest betting on a diversified portfolio of regional assets through either our SBS Renta Mixta FCI or the more aggressive SBS Latam FCI. Moreover, we continue to believe macroeconomic conditions demand highly dollarized portfolios and like to channel peso investments through inflation linkers. Finally, we see a very attractive opportunity for long term equity investments through our SBS Acciones Argentina FCI.
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