/Emerging Markets Report: Why Latin American investors aren’t freaking out over Argentina’s election

Emerging Markets Report: Why Latin American investors aren’t freaking out over Argentina’s election


Argentine assets may be in for more pain if President Mauricio Macri is turned out of office in Sunday’s election, as expected, but broader Latin American markets are likely to continue shrugging off political developments in Argentina and unrest elsewhere in South America, argued one economist in a Friday note.

“Even if Peronists sweep to power in Argentina again, and protests rumble on elsewhere, there are reasons to think that the MSCI Latin America Index as a whole will hold up better than some of its regional peers in the next year or so,” said Oliver Jones, senior markets economist at Capital Economics.

Jones was referring to the opposition ticket headed by longtime political insider Alberto Fernandez and his much more well-known, and controversial, running mate, Cristina Fernandez de Kirchner, a former president and Macri’s predecessor.

Argentines will be voting in the first round of the presidential elections on Sunday. A candidate needs to win either 45% of the vote or 40% with a 10 percentage point margin over the runner-up to claim outright victory. Otherwise, the top two candidates will go head-to-head in a runoff vote on Nov. 24.

Fernandez is heavily favored to win. A much stronger-than-expected showing over Macri in the August primaries sent shock waves through financial markets, sending the Argentine peso and equities tumbling.

The pro-market Macri won election in 2015 with a promise to revamp the country’s economy. But those efforts were derailed in 2018, when crisis struck and Macri was forced to seek out a $57 billion loan from the International Monetary Fund. A deep recession and soaring inflation have plagued the economy, with gross domestic product on track to have shrunk by 3.4% by the end of Macri’s term and inflation set to total 240%, according to the Brookings Institution.

The peso

USDARS, +0.6051%

 has tumbled around 37% verus the U.S. dollar in 2019 alone. Argentina’s benchmark stock index

SPMERVAL, +3.12%

 is up 13.5% in 2019 in local currency terms but remains off more than 23% from its levels ahead of the August primaries. In U.S. dollar terms, the index is off 28.4% so far this year after a 50% drop in 2018.

The MSCI EM Latin America index is up 9.2% so far in 2019. Meanwhile, the Global X MSCI Argentina ETF

ARGT, +0.27%

 is off 4.4% so far this year.

In fact, the Latin America Index is up more than 3% in the past week, despite the looming Argentine election, protests in Bolivia, and a breakdown in talks in Ecuador that had helped to end earlier anti-austerity demonstrations, Jones noted. Also, Chile has been racked by strikes and unrest as well.

The buoyancy of the MSCI EM Latin America index is no mystery. Bolivia and Ecuador aren’t included in the benchmark index, while Argentina’s share is less than 2%, he noted (see chart below), while Chile’s stands just a bit larger at 8%. The heavyweights are Mexico and Brazil. And Brazil has seen relatively little unrest given the scope of a pension overhaul pushed through, against the odds, by the administration of Jair Bolsonaro, Jones said.

Capital Economics

Brazil’s benchmark Bovespa Index

BVSP, +0.35%

 was up 2.5% this week.

“As far as the outlook is concerned, we think that there could be yet more pain to come for Argentine assets following a Fernández-Fernández victory in the election,” he said. “And it is fair to say that a lot of good news on President Bolsonaro’s broader economic reform agenda in Brazil is already discounted. But even allowing for that – plus the possibility that the protests in the Andean economies continue – we think that the MSCI Latin America Index will not fare as badly as its EM Asian counterpart.”

The MSCIA EM Asia Index rose 0.8% over the past week and is up 7.5% so far this year. It’s more vulnerable to any escalation of the U.S.-China trade war and the further slowdown expected for China’s economy in coming quarter, Jones said.

Meanwhile, for Argentina, the election results might provide some relief regardless of outcome, analysts said.

At this point, “a first round win would be perceived as a positive outcome by the markets in that Argentina needs to immediately implement a credible economic program, re-establish discussions with the IMF, and approach investors on re-profiling/restructuring the sovereign’s debt,” said Uday Patnaik, head of emerging market debt at Legal & General Investment Management, in a note this week.

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