Knowing that there are still high levels of uncertainty about the way in which all the options that make these agreements are defined and their implications in the medium and long term, We set out to start thinking about the opportunities that may arise if this negotiation is successfully completed.. These types of exercises serve to identify opportunities and be prepared to take advantage of them if the scenario flows towards the positive path.
Therefore, let us assume that a Multi-Year Program is agreed that is aligned with the necessary goals to make the debt payment sustainable and therefore that serves as the basis for an agreement with the IMF. What opportunities can appear? What are the signs that could begin to indicate that the economy is entering a virtuous path? Answering these questions can help us to be prepared to recognize and therefore quickly take advantage of positive scenarios, before a price correction occurs.
If we focus on the first objective, which is to recognize signals that may anticipate such a scenario, we should first pay attention to the objectives that are agreed in the Multi-Annual Program and the political support it receives. Achievable objectives, which imply ordering and correcting the main imbalances and strong political support could be a first sign, even prior to the expected agreement with the IMF.
A virtuous scenario should have as its main characteristic that it generates a path of narrowing the exchange gap and a reduction in the inflationary rhythm. If that path is achieved, Where could investment opportunities appear?
To answer this second question we need to review a couple of concepts, the first is that Although there is uncertainty about what the equilibrium real exchange rate is, the majority opinion tends to think that the official dollar is cheap, but the free dollar is expensive.. This is an important definition that helps us to assume that in a scenario of gradual normalization and reduction of the exchange gap, the official exchange rate and the price level would have a greater increase than the financial dollar (CCL).
Let’s start the analysis for investors who are in pesos. If funds are available, the longest stretch of the CER Curve offers inflation returns + 6/8 points (TX 28 to DICP). These are real interest rate levels that are high relative to historical local market averages. For example, a DICP, which today offers an IRR of 8%, can generate capital gains of the order of 6% for each point that the discount rate drops.
In other words, if the economy goes towards levels of 5% of positive real rate, it has a potential capital gain of 18%. To this performance must be added the reduction in the gap between the free dollar and inflation, a figure that in positive scenarios could even triple the performance.
In the equity segment there are also opportunities, the dollar valuation of the companies is below their historical averages. For example, the Rofex 20, which today is at USD 583 valued to the MEP dollar, had highs of USD 1150 in the last two years and averages of USD 675 until the start of the pandemic. This implies that in very conservative scenarios it can generate minimum gains of 16% in dollars and if it is possible to return to the maximums, the potential for improvement in dollars is 100%.
These same opportunities are repeated for global bonds, where clear opportunities appear if the average country risk of comparable countries is converged (800 points). If that level were achieved, a bond with the GD 35 has a capital gain margin of 90%.
At Quinquela, we remain focused on hedging strategies, but we do not stop preparing to identify the possible appearance of these opportunities and make them available to our clients through the Quinquela Debt Argentina or Quinquela Actions funds.
General Manager of Quinquela Fondos del Grupo GST.
Source From: Ambito
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