Argentina’s election lures risk-taking investors into long-term gamble

NEW YORK, Oct 9 (Reuters) – Argentina’s presidential race is attracting some risk-taking investors to place bets, despite long odds that a new government will lift South America’s second-largest economy out of its deepest crisis.

While most traders are on the sidelines with excitement about the election and the hopes of libertarian Javier Millay, some brave bond investors are on the move.

Their gamble is that a more market-friendly government will emerge from the Oct. 22 vote, whether it’s led by Miley, main conservative challenger Patricia Bulrich or the ruling leftist candidate, Economy Minister Sergio Massa. – Center Peronist Alliance.

„Two-thirds of the country is voting for substantial fiscal consolidation, which as a bond investor, we’re very interested in,” said Christine Reid, New York-based portfolio manager at global investment manager Ninety One.

Reid, the investment firm, increased its allocation to Argentina since Miley won first place in August’s open primaries, which he acknowledged are high after a history of sovereign debt defaults — the ninth due in 2020 — and falling bond prices.

„There’s been a lot of pain from investing in Argentina over the last decade,” Reed said. „Those who are still around have probably lost money at one point or another.”

Millay, an economist and member of Argentina’s lower house of Congress, wants to drastically cut spending, ease strict capital controls and eventually dollarize the economy. In principle, these moves should be positive for markets, but may be difficult to pull off in an economy plagued by triple-digit inflation, negative net foreign exchange reserves, rising poverty and a depreciating currency. A $44 billion loan program with the International Monetary Fund (IMF) is also teetering dangerously.

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Bulrich, a minister in former President Mauricio Macri’s pro-market government, has pledged to cut the deficit and stop printing money. Masa, who represents the most centrist coalition in the ruling coalition, has pledged to have a zero deficit by 2024, although he has recently opened the spending pipeline to bolster his electoral hopes.

Rob Citron, founder of US-based hedge fund Discovery Capital Management, said Argentina offers the best opportunities among emerging markets.

„They support someone who is very radical in his ideas in terms of a true free market and small government,” he said of Miley. „These are very liberal ideas from an economic perspective, so I think it’s a generational change.”

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Unpopular populism

A key takeaway for investors since early August has been the weakness of Vice President Cristina Fernandez de Kirchner, a left-wing populist and former two-term president who has long butted heads with investors.

Fernández de Kirchner instituted currency controls and presided over a sovereign debt default during his presidency.

After a recent investor trip to Buenos Aires, BancTrust & Co analysts said the key takeaway from the meetings was „confirmation that the focus of the policy debate has shifted to a market-friendly framework.”

„We found a consensus that Kirchnerism will gradually move out of the center of the political arena regardless of who wins the election,” they wrote in a note.

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Reduced prices

Argentina’s bond prices in cents on the dollar trade in the high 20s and low 30s — much lower than countries currently in default, such as Ghana or Sri Lanka, which trade in the mid-40s.

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Depressed values ​​provide another reason to raise Argentina’s debt, said Thomas Haggart, portfolio manager in the emerging markets debt hard currency group at Janus Henderson Investments in Copenhagen.

„We have a little bit of an overweight in Argentina, but that’s probably more of a valuation argument right now than a very clear underlying situation,” Hauggard said. „I think most investors struggle a little bit to figure out what the underlying scenario is.”

There is also lingering concern over a possible Milei administration, whose party could face a hostile and divided Congress that would try to block any proposed reforms.

Morgan Stanley said in a recent note that despite the recent fall in bond prices on Argentina, while „there is still a path to a bull case scenario,” it is not yet time.

Armando Armenta, analyst for Latin American fixed income and currency markets at AllianceBernstein in New York, said it was a mixed picture.

„The performances of Milei and Bullrich should be welcomed by investors as signals of demand for change from current unsustainable policies,” he said.

„However, Miley’s plans and ability to deliver such change if she succeeds remain unclear, tempering the positive impact from the expected outcome.”

Report by Rodrigo Campos; Additional reporting by Carolina Mandel; Editing by Adam Jordan and Paul Simao

Our Standards: Thomson Reuters Trust Principles.

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Rodrigo Campos is in New York. He covers economic and financial news from emerging markets around the world, from Argentina and Turkey to the BRICs, from El Salvador to Suriname and Ghana. Rodrigo previously covered the US stock market for Reuters and covered arts and culture for the Colombian newspaper El Tiempo.

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