After a 2022 in which neither rates nor the dollar have managed to beat inflation, the start of the election year renews the uncertainty of investors who are looking for the most accurate ways to defend their savings.
“Last year’s balance ended up being negativeas only equities have been able to beat inflation, while country risk has increased by more than 30% and the exchange rate gap has narrowed slightly, while remaining above 90%,” says Martín Polo, Cohen’s Chief Strategist.
Polo signals that the big risk is in the dynamics of the foreign exchange market. “Argentina has a trade debt to pay with importers, to which must be added the drop in exports due to the drought and prices that will not be accompanied by the same. The positive thing is that there will be fewer energy imports”.
The lack of dollars will result in further obstacles. “Less dollars will come in and this will lead the government to put more restrictions on the foreign exchange market, so there will be greater pressure on the gap Already that importers will not be able to channel their demand for foreign exchange into the official market,” says Polo.
Inflation that hardly falls below 100% puts a cap on interest rates. “The best thing the central bank can do is that rates do not lag behind inflation. If inflation continues to accelerate, the central bank should follow the dynamics, to generate the expectation that they are not looking the other way.”
Although inflation has gone from 7.5% in August to 5.1% in December, the Central has maintained the reference rate at 75% per year. “Everything indicates that the drop in inflation in recent months has been temporary,” says Polo. “Inflation will pick up in January, February and March, which is why the government took quick action to disarm the expectation of a rate drop that had been generated in December.”
Javier Casabal, fixed income strategist at Adcap Grupo Financiero, argues that since the last rate hike last September “Leliqs are yielding more than 107% in effective rate (fixed terms are between 69% and 73%, a depending on the size), enough to cover a monthly inflation of 6.25%, which was the inflation we had between September and October. This level was positive in real terms and helped to control inflation to some extent“.
However, Casabal cautions that “it would be a mistake to claim victory prematurely and lower ratesabove all because the current question is whether this drop in inflation that we are seeing is permanent or seasonal and, therefore, can recur when the increases start to arrive, as mentioned in recent days, for example for meat”.
stop the dollar
While maintaining the rate, the government lowered a change in the devaluation rate, which went from slightly above inflation in the latter stretch of 2022 to slowing in January.
“Inside creeping peg The electoral context plays a lot. The devaluation rate that beat inflation in the last quarter of the year is no longer We will return to the exchange rate lagging behind interest rates and inflation“Says Polo.
Inflation closed at 94.8% last year and the official dollar increased by 70%. Also alternative dollars lost by different entities against prices. “The general rule is that inflation will outpace devaluation, though not by much. This year will be smoother than last year.”
“Let’s wait a 2023 with inflation exceeding the official exchange rate and with the exchange rate differential increasingwith high volatility due to the electoral context and the effects that the drought and the decline in employment will have on the level of activity,” says Polo.
“Central policy seems to validate a level of inflation around 5%. But being an election year it would not be unusual for attempts to use the dollar as an anchorso I guess it keeps the current rate of devaluation, around 5.2%, just above the latest inflation figures of 5.1% but slightly below core inflation at 5.3%,” he says Casabal.
Both the blue and financial dollars are off to a strong start this year, 12% and 7% respectively. Will this trend continue? “Liquidity with liquidity is the most difficult variable when it comes to taking positions. Its evolution will depend exclusively on the electoral result. A ruling party victory would bring it closer to the critical values of October 2020 and July 2022, while an opposition victory would result in a positive shock to expectations and lower the value of the free dollar,” says Siaba Serrate, Head of Research & Strategy at Personal investment portfolio (PPI).
For Polo, the outlook for the elections is that the market “is calm because there are expectations of a change of cycle. This is why there has been a recovery in bonds and shares”.
“Undoubtedly, we are facing a crucial year for Argentina. A baseline scenario proposing a (more market-friendly) change of administration at the next general election forces us to review the notes of other past experiences, where both bonds and shares have shown strong attractive returns during the previous 9 months (on average),” says Siaba Serrate.
However, underlines the Ppi analyst, “the electoral front does not minimize the challenges that the economy has to face, above all given the avalanche of pesos looming on the horizon. The eventual exit from the securities, which is necessary to normalize the exchange sty and its unpleasant consequences, presents a great risk to the peso debt and to all its holders. Therefore, we prefer to adopt a defensive strategy on local currency securities, reducing the probability of being directly or indirectly exposed to a shock in this asset class”.
Debt in pesos defines the risk scenario for the local economy. “In the weight market, 5% of GDP maturing local currency debt to private companies is in itself a risk factor. As if that weren’t enough, it will be a real challenge for the government to reduce (or liquefy) the fiscal deficit in an election year,” says Polo.
Source: Clarin
