Market's view before PASO elections

Thinking over what's next.

If government gets approved by a strongly favorable results' elections, it would be wise to expect more of what we have witnessed so far. By contrast, a remarkable defeat would lead the government to fasten and deepen existing, multiple macro imbalances so as to capture pendular votes. That said, we believe that any outermost result will not bring significant discontinuity of current policies. On the other hand, other result apart from those would be ambiguous. There would bes nothing but uncertainty. All in all, presidential election in 2023 seems to be the truly Rubicon river.

S&P Merval's context facing mid-term elections.

As the legislative elections are taking place next Sunday, let's take a look at the local capital market. In line with an expected behaviour in a political year, the monthly average variation of S&P Merval index (measured in USD using the BCS as FX rate) is 27% above YTD. Like it happened in 2013 and 2017, this year's rally observed in equity market seems to be election-driven and short in lifetime. However, this year's index performance has a particular pattern. Between last May and June showed what it looked to be a rally, since it peaked +14% so far that time. Nonetheless, it ended up being a pullback, related to post-second wave effects. From the August' bottom (-3% YTD), the elecion-linked rally started, reaching the highest value since then on September 8th (+20 YTD).

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Historical view and volume of the Index.

Taking into account latest months, S&P Merval in USD has being traded at levels of 2Q-2013. Even further back, at levels of 3Q-2009. Regarding volume matters, market sources reckon that during 2018 daily volume on average reached USD 180 mn (82mn of nomimal value). By contrast, the figure so far this year hit USD 39 mn (47mn of nomimal value). A priori, it may be said that due to both price and volume at historical bottom relative low inflows of money could impact remarkably on the equity market. However, we do not see many fundamental drivers for investors to do so.

Smart money: that's another story.

Bonds market has been dissociated to equity since sep-20, when the exchange debt arrengment took place. In a nutshell, the reason could be summed up as it follows: the risk perception of Argentina has not changed since then. Bonds' prices are not rallying, so upside potential of equity is narrow (or at least short-lived). In our eyes, as long as such divergence between equity and bonds last, it is unlikely equity will keep on going up much further.

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BCRA facing pressure on FX.

In the last 7 trading days, the Central Bank was net seller in FX market as election-related uncertainty get stronger. As a result, it sold ARS 50.5bn (USD 517) to private sector. It is worthy to note that this happened even though the goverment is determined to prevent any kind of portfolio dollarization by all means. That said, inflation-linked bills have suddently inverted its yields curve. As 5-month-duration bills yields almost 6%, after election we may see if this selloff was due to investors' assest swapp strategy or something more complex, with fiscal impact on the financial program.

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Mariano Sanchez Moreno

Senior Economist at Alphacast. Former operations analyst. I’m keen on capital markets, finance and R.

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