Argentine stocks bet on government to suffer setbacks in vote

Argentine stocks have posted the world's biggest rally this month as investors increase bets that this weekend's midterm elections will strengthen the power of opposition parties and derail the government's left-wing economic agenda.

The benchmark S&P Merval index has risen 10 per cent since late October, measured in dollar terms, using the so-called 'blue-chip swap' rate used to circumvent exchange controls. Shares of banks and industrial companies have led the gains during the period.

President Alberto Fernández's government suffered a major blow in last August's primaries, in which the opposition won a majority of the votes. Polls suggest that the November 14 elections could end in a similar defeat for the Peronist leader, who has used currency restrictions, price freezes, export bans and other unorthodox (and largely unsuccessful) tactics to try to boost the economy.

"There is demand from investors right now positioning themselves in Argentina for the long term, as they expect a change in the political landscape," said Juan José Vázquez, head of research at Cohen SA in Buenos Aires.

While Vazquez believes the optimism is unfounded, he also points out that valuations are low enough that some investors are attracted to the stock for that reason.

It is difficult to predict whether the election will finally causes the government to moderate its policies or, instead, prompts officials to redouble state intervention in the economy, according to Francisco Choe, portfolio manager of FIMA Funds at Banco Galicia in Buenos Aires.

"Volatility will be very present and the political context will be very difficult," he said. "There will be a debate between expectation and reality over the next two years."