Argentina investors find hope in Milei election surprise

Argentina investors find hope in Milei election surprise

Argentina’s Primary Election Result Signals Potential Economic Reforms


In the aftermath of Argentina’s primary election results, which saw bonds and the peso slide due to central bank moves, investors in the country’s financial markets are finding a silver lining. They believe that the election outcome, which handed a big win to right-wing populist Javier Milei and saw a nomination for the conservative coalition won by hardliner Patricia Bullrich, will likely hasten much-needed economic reforms.

The Sunday primary election, often considered a dress rehearsal for the general election in October, initially introduced uncertainty into asset pricing. Traders sold stocks and dollar bonds, causing prices to drop. However, the situation later stabilized, and the local stock market closed over 3% higher.

Both Bullrich and Milei have pledged to implement drastic economic measures to address the country’s challenges, including its high inflation rate of 116%, even higher interest rates, negative net foreign currency reserves, and a complex web of capital controls to protect the plummeting peso.

“The surprisingly strong showing for far-right… suggests that there is popular appetite for a shock-therapy style approach to deal with the economy’s problems,” said Kimberley Sperrfechter, an economist at Capital Economics.

Despite acknowledging the potential economic disturbance caused by the tight race for the October presidential election, with current economy minister Sergio Massa striving to make up ground, analysts believe that the rejection of the left-leaning Peronists marks a significant change in Argentina’s political landscape. For decades, the Peronists, specifically the populist wing led by Vice President Cristina Fernandez de Kirchner, have been skeptical of big business and proponents of generous welfare spending. These policies have left them unpopular with financial markets.

Investors noted that the end of Kirchnerism is a more powerful driver than concerns over Milei’s governability. Walter Stoeppelwerth, chief strategist at brokerage Gletir SA, firmly believes that Argentina is now a “good place to add risk.”

However, Milei still faces a considerable challenge in converting his primary election win into a successful presidential run. Even if he manages to secure the presidency, he would face significant opposition from a likely divided Congress.

“The PASO (primary) tends to be a rejection vote, and the actual vote may be different,” said Shamaila Khan, head of fixed income for Emerging Markets and Asia Pacific at UBS Asset Management. “We do believe all election outcomes will lead to better policy-making.”

Following the election results, dollar-denominated bonds experienced a decline of up to four points, with bonds maturing after 2020 yielding between 19% and 37% at current prices. The government responded by devaluing the peso, a move that had long been suggested but was previously opposed by the government. The official peso fell nearly 18% to 350 per dollar, although parallel rates reached as high as 700. Furthermore, the central bank raised the benchmark interest rate from 97% to 118%.

Interestingly, despite the initial drop, the local Argentine stock market benchmark, MERVAL, ended at a fresh record high. On the other hand, the MSCI index of Argentine stocks, traded in dollars, fell over 3%.

While the voters in Argentina seem to have expressed support for tougher measures to address the economic woes, implementing these measures may not be easy, particularly if austerity measures trigger public anger.

“The range of potential outcomes is wide; however, the bar is low for an enhanced policy outlook,” said Samy Muaddi, a portfolio manager at T. Rowe Price. “That said, given economic and institutional scarring, it would be a Herculean task to put Argentina on a path to market access even in the most optimistic scenario.”

In conclusion, Argentina’s primary election results have created uncertainty in the financial markets, but investors are optimistic that the outcome will lead to much-needed economic reforms. The rejection of left-leaning Peronism and the rise of right-wing populism indicate a desire for a shock-therapy approach to address the country’s economic challenges. While challenges and potential economic disturbances remain, many believe that all election outcomes will ultimately result in better policy-making. However, the road to recovery will not be easy, and Argentina will need to navigate a complex path to improve its economic prospects and regain market access.