- President Mauricio Macri’s surprise defeat in last weekend’s primary election prompted fears that key reforms may be reversed, causing a sell‑off in the peso and Argentine stocks and bonds.
- Populist opposition candidate Alberto Fernández is now expected to win October’s general election, but considerable uncertainty remains over what policies his government will pursue.
- We trimmed our exposure to some Argentine assets in our equity and debt portfolios and are ready to act further should the situation change.
The rout of Argentine assets that followed last weekend’s surprise election result has caused considerable concern among emerging market investors. A number of T. Rowe Price portfolios have been exposed to the sell‑off, and although we reduced our exposure in some areas, we continue to hold some Argentine assets while we monitor the situation in order to properly gauge the country’s medium‑ to long‑term economic and political prospects.
Argentine primary elections are held to whittle down the number of candidates participating in the general election and are typically regarded as a reliable guide to the outcome of the latter. Although the market‑friendly President Mauricio Macri is safely through to October’s general election, his heavy defeat to populist Peronist opposition candidate Alberto Fernández and vice presidential candidate Cristina Fernández de Kirchner (32% versus 47%) in last weekend’s vote was a shock. Polls had suggested a much closer race.
While it remains unclear exactly how presidential candidate Fernández and vice presidential candidate Kirchner would govern if they were to win the general election, Kirchner’s record when she was president from 2007 to 2015 alarms investors: Her tenure was characterized by corruption, rampant inflation, and damaging government intervention in the economy. Since gaining power, Macri’s technocratic government has pursued a number of key economic reforms; the prospect of those reforms being reversed prompted this week’s sell‑off.
T. Rowe Price’s Exposure to Argentina
In fixed income, our largest exposure to Argentina is in our Emerging Markets Bond Strategy, which had an overweight position in the country relative to its benchmark, the J.P. Morgan Emerging Markets Bond Index Global, when yields spiked on 12 August. The vast majority of our Argentina exposure in this strategy is in hard currency government bonds with maturities inside of 2030. Given our overweight position here, the sell‑off had a negative impact on the strategy relative to the benchmark.
We had minimal exposure (less than 1% on August 12) to Argentina in both our Emerging Markets Local Currency Bond Strategy and our Emerging Markets Corporate Bond Strategy. We expect this week’s sell‑off to have a neutral impact on the former strategy’s relative performance and a positive impact on the latter strategy’s relative performance given its underweight position to Argentina compared with its benchmark. We will continue to weigh the strong yields available from Argentine debt against the risks associated with them.
In terms of equity strategies, within frontier markets, we had cut our absolute positions in Argentina to keep risk under control after the country left the MSCI Frontier Markets Index at the end of May. The primary election result has significantly altered our outlook for prospects for Argentine stocks, particularly domestically focused companies dependent on the performance of the local economy. We are reviewing remaining portfolio holdings accordingly.
For emerging market equity strategies more generally, companies with business exposure outside Argentina (such as MercadoLibre, a leading digital financial services provider in South America, and Tenaris, a global oil pipe producer) have held up relatively well amid the broader market downturn, with a relatively muted price reaction. We think their longer‑term prospects will continue to be underpinned by the performance of their operations outside Argentina. We will continue to monitor the fundamentals of these companies in the evolving environment.
All Eyes on October
While it is possible that Macri regains ground before October’s general election, perhaps benefiting from a higher turnout and investor nervousness at the negative market reaction to the primary election result, the size of his task looks insurmountable. It is therefore prudent to assume a strong likelihood that a new government led by Fernández and Kirchner will take over the running of Argentina later this year.
The market’s worst fears are that a Fernández‑Kirchner victory would see a return to a Peronist government characterized by populist policies, currency and capital controls, and debt defaults. Therefore, the key question is whether Fernández will take more concrete steps to outline an economic program consistent with a new International Monetary Fund program and reestablishing market access. He comes from a more moderate strain of Peronism than Kirchner and has made some market‑friendly overtures as the campaign has progressed. However, he has not defined a coherent economic policy program and uncertainty reigns. Until Fernández can establish some degree of trust with markets, capital outflows from local and foreign investors could intensify and the macroeconomic situation is likely to deteriorate. In the meantime, we believe the specter of default risk is likely to weigh heavily on Argentine assets until the election is held.
We are cautiously positive on emerging markets more broadly. In the past, markets have typically focused on country‑specific economic and political attributes, and we expect this to continue. However, the situation in Argentina may put renewed focus on countries that appear vulnerable in terms of funding.
Globally, the situation in Argentina will be monitored closely by markets
already nervous about tense U.S.‑China trade relations, Brexit, the inverted yield curve, and the rise of populism. A Fernández‑Kirchner general election victory could be interpreted as yet another example of populist politicians seizing power from pro‑market parties and, as such, would be greeted with widespread apprehension.
Key Risks—The following risks are materially relevant to the strategy highlighted in this material:
Transactions in securities denominated in foreign currencies are subject to fluctuations in exchange rates which may affect the value of an investment. Returns can be more volatile than other, more developed, markets due to changes in market, political and economic conditions. Debt securities could suffer an adverse change in financial condition due to ratings downgrade or default which may affect the value of an investment.
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