4 April 2017
Equity valuations are likely to consolidate through the second half of 2017 until October’s mid-term election, presenting an enticing longer-term 2018 entrance point. The current account deficit should stay close to -3% and FX reserves above USD 40 billion. Fiscal targets may well slip in the election period, but should tighten up again in 2018 as the government targets a primary fiscal surplus in the longer-term.
In the short term, market directionality is a tricky call, especially following January’s strong rally in cyclical stocks. Current expensive valuations in the banking sector, together with a broad rally in the utility sector following tariff reviews, have made Argentinian equities temporarily unattractive. Investment opportunities are particularly difficult to value ahead of the greater short-term focus on October’s mid-term election, which is only eight months away in a very fluid political landscape.
The rate of change of the CPI, credit availability and GDP growth will be key indicators to watch. Should they turn negative by the end of the first quarter, much of the market’s spectacular gains would evaporate in a period of profit-taking. Longer-term, given that the government still has two further years incumbent post October’s mid-term elections, we would buy such a dip.
Between governor / mid-term elections and national election rotations, there is only a small window for change for a new ‘reformist’ government to implement strong political action. In effect, it’s a rolling two-year window. Nevertheless, the new incumbent government has achieved a lot since Mauricio Macri was appointed.
The president’s accomplishments to date have included: reforms, growth enhancement measures and capital account changes. Some of the most successful achievements include settling Argentina’s outstanding sovereign debt issues with ‘holdout’ creditors, addressing tariff imbalances in the utility sector and implementing a free-floating currency-exchange policy.
In addition to this, Marci’s government has removed capital controls, thus increasing the chances of Argentina’s reclassification to ‘emerging market’ status. Argentina may see USD 1 billion of inflows as a result of re-inclusion in MSCI benchmarks. Meanwhile, real wages have increased and a strong rebound in investment is now evident – these factors should drive stronger consumption and we expect to see an economic rebound this year.
The Government has achieved modest short-term fiscal progress and is in the process of creating a mining bill to boost inward FDI flows, while a tax amnesty declared last year saw ARS 7.7 billion worth of tax paid on assets in January.
A buying opportunity
Going into the mid-term elections investors may wish to trim some profits, although we have decided to keep our two main holdings for now.
We would buy Argentinian equities in response to any populist polling setbacks or short-term GDP slowdown, or even CPI spikes. We expect entry points to materialise in mid-2017 ahead of the October elections.
Important legal information
The information in this document is given for information purposes only and does not qualify as investment advice. Opinions and assessments contained in this document may change and reflect the point of view of GAM in the current economic environment. No liability shall be accepted for the accuracy and completeness of the information. Past performance is no indicator for the current or future development.