Emerging Markets Report: Why Latin American investors aren’t panicking over Argentina’s election

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Argentine assets suffered Monday after President Mauricio Macri was defeated, as expected, in Sunday’s election. But broader Latin American markets have largely shrugged off Argentina’s continued economic crisis and unrest elsewhere in South America so far this year.

The pro-market Macri on Sunday night conceded defeat to a leftist opposition ticket headed by longtime political insider Alberto Fernandez and his much more well-known, and controversial, running mate, Cristina Fernandez de Kirchner, a former president and Macri’s predecessor. The government on Monday tightened capital controls in an effort to preserve its foreign-currency reserves, The Wall Street Journal reported.

Read: Opposition candidate Fernandez wins Argentina presidential election

But analysts have noted that concerns around Argentina have remained largely contained—and some expect that to remain the case.

“Even if Peronists sweep to power in Argentina again, and protests rumble on elsewhere, there are reasons to think that the MSCI Latin America Index as a whole will hold up better than some of its regional peers in the next year or so,” said Oliver Jones, senior markets economist at Capital Economics, in a Friday note.

Fernandez was heavily favored to win. A much stronger-than-expected showing over Macri in the August primaries sent shock waves through financial markets, sending the Argentine peso and equities tumbling.

The pro-market Macri won election in 2015 with a promise to revamp the country’s economy. But those efforts were derailed in 2018, when crisis struck and Macri was forced to seek out a $57 billion loan from the International Monetary Fund. A deep recession and soaring inflation have plagued the economy, with gross domestic product on track to have shrunk by 3.4% by the end of Macri’s term and inflation set to total 240%, according to the Brookings Institution.

The peso USDARS, -0.7469%  has tumbled around 37% verus the U.S. dollar in 2019 alone, but gained ground on Monday, rising around 0.9%. Argentina’s benchmark stock index SPMERVAL, -4.04%  fell 3.4%. It’s up more than 10% in 2019 in local currency terms but remains off more than 25% from its levels ahead of the August primaries. In U.S. dollar terms, the index is off 30% so far this year after a 50% drop in 2018.

Meanwhile, the Global X MSCI Argentina ETF ARGT, -1.53%  was off 1.7% Monday, extending its year-to-date decline to 5.8%.

The MSCI EM Latin America index is up nearly 9% so far in 2019. In fact, the Latin America Index rose more than 3% last week, despite the looming Argentine election, protests in Bolivia, and a breakdown in talks in Ecuador that had helped to end earlier antiausterity demonstrations, Jones noted. Chile has been racked by strikes and mass protests as well.

The buoyancy of the MSCI EM Latin America index is no mystery, Jones said. Bolivia and Ecuador aren’t included in the benchmark index, while Argentina’s share is less than 2%, he noted (see chart below), while Chile’s stands just a bit larger at 8%. The heavyweights are Mexico and Brazil. And Brazil has seen relatively little unrest given the scope of a pension overhaul pushed through, against the odds, by the administration of Jair Bolsonaro, Jones said.

Capital Economics

Brazil’s benchmark Bovespa Index BVSP, +0.82%  rose 2.5% last week and advanced 0.9% on Monday.

“As far as the outlook is concerned, we think that there could be yet more pain to come for Argentine assets following a Fernández-Fernández victory in the election,” he said. “And it is fair to say that a lot of good news on President Bolsonaro’s broader economic reform agenda in Brazil is already discounted. But even allowing for that—plus the possibility that the protests in the Andean economies continue—we think that the MSCI Latin America Index will not fare as badly as its EM Asian counterpart.”

The MSCI EM Asia Index rose 0.8% last week and is up 7.4% so far this year. It’s more vulnerable to any escalation of the U.S.-China trade war and the further slowdown expected for China’s economy in coming quarter, Jones said.

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