Electoral impact on the Stock Market: the scenarios that the market handles for stocks and sovereign bonds

According to analysts Proficio Investmentalthough the polls place the ruling party (LLA) just 2 points above Fuerza Patria (FP) and allies, the recent experience in Buenos Aires forces us to take these data with caution.

In this framework, the broker defines a “positive scenario” as a result of a technical tie, within the margin of error of ±2 points. “This scenario, although it would present some variability in the short term depending on which of the forces comes first, would be a favorable result for the Government for the next two years of management,” they hold.

What can happen with bonds in pesos and the dollar after the elections

Under this panorama, it is anticipated a normalization of the bond market in pesoswith a drop in rates after months of financial stress. “This relief in rates could also favor the recovery of activity, which has stagnated in recent months, giving a greater boost to government support,” adds the Proficio report.

The entity also projects a relief in dollarization pressure after weeks of strong demand for coverage, and positive behavior in sovereign bonds in dollars, thanks to the support of the US.

At the other extreme, the “negative scenario” would be a defeat for LLA by more than 5 points. “If this scenario occurs, a new negative shock will probably occur, of similar or worse magnitude than the one observed after the PBA elections,” warns Proficio.

Then, They do not rule out a total liberation of the exchange rate schemewhich would imply an overshooting of the exchange rate and losses in short-term peso securities. “Except for an extremely bad scenario for the Government (LLA totaling less than 28% at the national level), the third of deputies to defend the vetoes would be guaranteed,” they clarify.

Likewise, an intermediate result (a defeat by between 2 and 5 points) could generate a temporary correction, but “without compromising the possibilities of re-election or the stability of the economic program,” the report summarizes.

Scenarios for dollar bonds and Argentine stocks

On the other hand, since Personal Investment Portfolio (PPI) segment the possible electoral impact in three scenarios: a victory for the ruling party, a technical draw (±5 points) or a comprehensive defeat (+5 points).

In the first, the entity projects marked optimism: “A victory for the ruling party would reinforce the economic and fiscal program and, above all, it would give the Government greater flexibility to promote reforms that are key to its plan such as labor and tax reform.”

In this case, PPI anticipates that victory could “open the door to capital inflows,” increasing appetite for Argentine debt and raising the value of sovereign bonds. The S&P Merval would also benefit, with increases led by energy and financial stocks. “Buying sovereign bonds in dollars and local stocks could be a good strategy for the most aggressive investors,” they conclude.

For the scenario of a technical tie, the broker foresees continuity of volatility and uncertainty. “We would find ourselves in a market of considerable volatility and continued uncertainty. This result suggests a fragmented Congress and would lead the Government to have to negotiate a lot for each possible reform,” the report states. In this context, the negotiable obligations of companies with good credit quality would be the most defensive instruments.

Finally, if the ruling party suffers a defeat similar to that observed in Buenos Aires, PPI expects “a significant change in the economic agenda and policies,” with increase in country risk, pressure on financial dollars and dismantling of positions. FFaced with this adverse scenario, the recommendation would be to “invest in dollarized assets such as money market mutual funds or Cedears.”