Argentine bonds and stocks extended a rally for a second session on Tuesday as investors bet that President-elect Javier Milei will be able to pull the cash-strapped economy out of a crisis, a huge challenge that is expected to keep investors on their toes for the next few months and has a chance of failing, analysts told LatinFinance.
“The market understands that Argentina is drowning in the short term, but investors have also lifted up their heads a little and said that there is something here,” said Mauro Mazza, an analyst at Bull Market Brokers in Buenos Aires. “Investors are buying for the long term despite the purgatory that we are going to have in the short term.”
Argentine stocks and bonds shot up on Monday and continued to gain on Tuesday in the wake of Milei winning the presidential runoff election on Sunday by a much wider-than-expected margin of 11.4 percentage points.
Argentina’s S&P Merval index of blue-chip stocks gained nearly 18% on Tuesday, the first day of trading in the local market after Sunday’s election and a public holiday on Monday. That followed an average 20% rise in Argentine ADRs on Monday in New York, led by local oil company YPF with a 40% increase.
The recovery came as a surprise for three main reasons. The first is that Argentina has been mired in an economic crisis since 2018, with its fortunes worsening this year. Inflation is touching 143%, the peso loses value almost every day, and the benchmark interest rate is the highest in the world at 133%. The second reason is the resounding win by Milei against Economy Minister Sergio Massa of the ruling left-leaning Peronist Party. Milei had been expected to win, but only by two to three points. The third reason is that assets in Argentina were cheap — and still are, Mazza said.
Mazza said the big test for Milei will be in the short term.
A libertarian economist and political outsider, Milei will not have much time after taking office December 10 to “score two or three goals” with economic measures if he wants to retain the confidence of both Argentines and the markets, Mazza said.
Milei appears to know this. “The situation in Argentina is critical,” he said in his victory speech on Sunday night. “The changes our country needs are drastic. There is no place for gradualism, for lukewarmness, for half measures. If we do not move quickly with structural changes we are headed straight for the worst crisis in our history.”
This call for quick action is bolstering market confidence, as are his pledges to attract more private investment, pursue free markets and deregulation, honor the country’s debts, slash the fiscal deficit and sell off public companies, including the state’s 51% stake in YPF, Argentina’s biggest energy company.
At the same time, Milei’s political support bodes well for his success. The backing of former President Mauricio Macri, who ruled from 2015 to 2019, has created an alliance of two right-of-center political parties that are ruling together for the first time in decades. Both sides agree on most issues, from reforming the state to cutting state spending and running a fiscal surplus. This reduces the chances for bickering and increases the chances of pushing through policies, with the only major sticking point being dollarization. Milei wants to dollarize; Macri doesn’t.
No matter the strong mandate and high hopes for change in Argentina, Milei won’t have an easy first three months.
Inflation is expected to reach 185% by the end of the year and surpass 200% next year, according to a survey of economists by the central bank.
Unable to rein in inflation during his honeymoon period, Milei likely will focus on containing the central bank’s liabilities, estimated at 13% of GDP, cutting the fiscal deficit at 5% of GDP, and pushing ahead on a dollarization plan, Mazza said.
Milei has a few things going in his favor. The large agriculture sector is expected to bring a record harvest starting in March next year, while rising production in the giant Vaca Muerta shale formation is poised to make oil and natural gas the next big source of export revenue. Lithium and other metals could follow suit in the next few years.
This long-term potential could fuel more growth in bonds and stocks.
“Stocks have more potential to gain,” said Gustavo Neffa, a director of Research for Traders, an investment consultancy in Buenos Aires. “There is optimism about the change in course in economic policy.”
Investors didn’t buy everything Argentina in the equity market but bet more on services companies. Local telecommunications company Telecom Argentina and the toll road operators Autopistas del Sol and Grupo Concessionario del Oeste were some of the biggest gainers, for example. Both are poised to benefit from large investments to improve the country’s infrastructure.
On Tuesday, incoming Infrastructure Minister Guillermo Ferraro said Milei’s government will seek private investment to rebuild the nation’s sagging infrastructure.
“The approach we have is that the state has to reduce its participation in the economy to make room for the private sector,” Ferraro said on Radio Mitre. “There is an enormous opportunity for the private sector to invest in Argentina.”
Norberto Sosa, a director of the IEB Invertir en Bolsa brokerage in Buenos Aires, said another medium-term benefit could come from improving relations with the US thanks to Milei’s pro-market and liberal policies.
“The United States could now look at Argentina as a more strategic opportunity,” Sosa said.
This could help fuel the investment strategy of buying for the long term and riding through the storm in the short term, he added.
Sosa said another spot of cheer for the markets stems from the several cabinet members already named by Milei and the others who could be appointed, like former central bank president Federico Sturzenegger and ex-Economy Minister Luis Caputo. The cabinet is expected to be filled with skilled professionals.
Yet there is always a sense of caution because this is Argentina.
While its debt maturities are easy-to-manage through 2024, the country has a reputation as a serial defaulter with frequent economic crises over much of the past century.
Indeed, Fitch Ratings said on Tuesday that the need to rebuild reserves from a dangerous low of $21.5 billion and regain access to international capital markets to avoid restructuring eurobond payments in 2025 “may be too large and difficult to deliver in the short timeframe.”
It’s a reality that may bite the markets.
“Argentina once again has a strategic opportunity,” Sosa said. “But we have missed so many opportunities in the past, and we could miss this one too.”
[PHOTO: Argentine President Alberto Fernández meets with his successor, President-elect Javier Milei, to discuss the transition. Source: Office of the Presidency.]