Investors have had more than two months to prepare for Sunday's presidential election. Now, with frontrunner Alberto Fernández all but assured of victory, the question is how much support the new government will get in Congress and how conciliatory he may prove to market-friendly incumbent Mauricio Macri.
Here are the assets to watch:
- Dollar-denominated bonds
Since most bonds trade over-the-counter, the market may react quickest, although liquidity starts to grow only during Frankfurt hours. Notes expiring in 2117 and 2033 trade the most on a daily basis. The bid-offer gap tends to be wide, so price moves after the election need to be analysed with extreme care. Local bonds have tanked since the August PASO 11 primary, with the century bond sliding to just 40 cents on the dollar. The price action signals that investors may be fully prepared for a market-unfriendly victory speech, leaving space for gains should a conciliatory tone win out instead.
- Depositary receipts
ADRs of Argentine companies traded in Frankfurt may also offer an early clue to market sentiment. Just four companies are listed: Banco BBVA, Loma Negra, Argentina Lithium & Energy Corp and Telecom Argentina. Liquidity may also be an issue, though, and investors should take sudden swings in stride. There are also almost two dozen depositary receipts in New York that start trading later than they do in Germany – but still before the local market has a chance to react.
- Credit default swaps
Like bonds that trade outside Argentina, the credit-default swaps are OTC contracts and may trade freely among counterparts. The problem: If the liquidity of the bonds is poor, negotiating insurance on the bonds is even thinner. The government already announced its wish to re-profile, and five-year insurance is pricing in a probability of default of above 95 percent. That means a significant move may only occur with a surprisingly positive outcome. NOTE: Set your pricing source to CMAQ, which has the most updated prices.
- Exchange-traded funds
Even the biggest ETFs focused on Argentina are relatively small, but their early moves may also offer a gauge for investors on overall sentiment. The ones to watch are Global X MSCI Argentina ETF and iShares MSCI Argentina and Global Exposure ETF. Trading begins at 9.30am New York time.
- Peso, local stocks and local bonds
When the currency and bonds start trading at 9am New York time (the Merval opens at 10am), it’s likely that investor sentiment will already be clear. Still, a move on these assets will be key as the liquidity will be higher. The official peso rate is under severe control and isn’t likely to reflect the market’s real mood. The blue chip rate – the price tracked when investors get money out of the country by buying bonds in pesos in the local market and selling them overseas in dollars – will be a better gauge.
Overall, investors seem better prepared for a Fernández victory. That creates an opportunity for those brave enough to bet that Fernández will tone down his campaign rhetoric and start building alliances with a victory speech that embraces both pro-market practices and social concern. As the unexpected primary results showed, however, it isn’t a wager for the faint of heart.
by Davison Santana, Bloomberg