If you have recently been following the presidential elections in Argentina, you were not alone: the financial markets have been documenting each development in the just-ended battle for presidency.
Gradual change vs quick change
With the end of Cristina Kirchner’s two-term rule, Argentinians are going to say goodbye to bloated social spending and utilities subsidies, a ‘victorious decade’, which resulted from the boom in commodity prices rather than any improvements made by the former president. Add double-digit inflation, fiscal deficit, overvalued official exchange rates and the unresolved bond default problem, which has been barring Argentina from international capital markets since 2002, and it becomes evident that assuming presidency is a risky step in today’s Argentina.
The two main options that electorate had were ‘gradual change’, proposed by Daniel Scioli, a Peronist who had Ms Kirchner’s support, and a ‘shock therapy’, promised by Mauricio Macri, a millionaire and the more investment-oriented mayor of Buenos Aires. While a couple of months ago few predicted Mr Macri’s victory, or even the second round, the markets have been positive on the ‘anything better than Kirchner’ thought. A poll among investor conducted in October by Financial Times showed investors’ increasing interest in Argentina. The fund managers who held Argentinian equities were going to increase, or at least not decrease, their investments. Others, however, preferred keeping no investment in Argentina, not sharing the optimism, and in a way, they have a reason not to do so — the lack of majority in Senate can prove to be a severe hindrance to Mr Macri’s rapid reforms.
Stocks vs bonds
So how did it all reflect in the capital markets? For starters, the stocks have been long impatient about the imminent change from Ms Kirchner’s regime, gaining 31% from the beginning of the year up to the election day. Then they appreciated another 25% in the period of less than a month before the second round after Mr Macri performed surprisingly well in the first one. Finally, the drop in the stock market right after the announcement of the results can be attributed to the short-term investors taking profit on the expected volatility before the next government’s policy is known.
As for the bonds, the classic ‘stocks up, bonds down’ rule did not work in this situation as the investors anticipated the resolution of the dispute with the holdout creditors under the new government, led by either Scioli or Macri. The government bonds had a dramatic surge in the last months with the 10-year yield plunging from September’s 9.5% to mere 2.3% after the announcement of the results.