Back from the carry trade? Investors digest dollar announcements and begin to rotate portfolios

Although the Government celebrates that the second stage of the economic program would definitively end inflation, the market showed its disagreement due to three variables that are not minor to take into account: an exit from the cepo that will be further away than expected due to doubts with the reserve accumulation process In this second semester, an accentuation of the recession of the economy and also the intervention in the financial dollar – which, even with a fiscal surplus, is still the government intervening in the exchange rate.

In this context, the question that arises for investors is: is it advisable to rotate portfolios from now on? How much has the outlook changed in the short and medium term?

In principle, there is one certainty: the Government maintains the crawling peg of 2% at least until the end of the year and that is why the Dollar-linked bonds also suffered a sharp decline on Monday. What is on the table now is whether the incipient demand for coverage that began two weeks ago will continue or not.

How will the new monetary scheme impact in the short term?

Personal Investment Portfolio (PPI) prepared a report that focuses on the short-term impact: reduction of the exchange rate gap, a improvement in the fixed rate peso debt (which favors the return of the carry trade) and a reduction in appetite for exchange rate and inflation strategies.

However, “beyond the short-term doubts – which are linked to the capacity to accumulate reserves – it is noteworthy that in the medium/long term it could be positive if this reduction in the gap improves the exchange rate normalization prospects to move towards the elimination of exchange controls.” If not, they say, “the outlook will be more complicated.”

What should you invest in after the new monetary regime?

PPI detailed the assets that will benefit in the short and medium term:

• Hard dollar sovereign debt: In the short term, uncertain, but in the medium and long term, very positive (but with some caveats). For PPI, the end of exchange controls and the accumulation of reserves in a sustainable manner over time can help reduce country risk.
• Sovereign debt in pesos – fixed rate –: the reduction of the gap and the expectation of softening exchange rate volatility in the short term could be positive for these instruments. In this sense, they recommend bills from September onwards in light of rumors of rate hikes in the shorter terms.
• Equity: Although it is uncertain in the short term, in the long term it could be very positive. “In the short term, the announced measure could harm equity if the reading is based on the fact that there will be a lower accumulation of reserves and that affects country risk. The additional risk premium would impact the discount rates applicable to Argentina, and therefore, the current value of the future flows of the companies,” the consultancy firm maintains.

In turn, it confirms that, in the medium/long term, the measure should help contain inflationary pressures and cooperate to achieve the end of the currency controls. “Both conditions would be extremely beneficial for Argentine companies. The first would allow companies to mark their products without falling into overpricing that affects demand. The second would provide a framework of certainty within which to operate, unhindering access to inputs needed to boost production. In turn, if the potential appreciation resulting from the measure were to trigger a greater feeling of wealth, this should flow into aggregate demand, feeding back into a recovery in activity,” he concluded.

For its part, Juan Pedro Mazza Sr. Fixed Income Strategist at Cohen He recommended that the change that should be made in portfolios is to diversify between coverage, dollar linked (6 to 12 months), lecaps and fixed rate “due to the volatility of the economic scenario.”

“Our recommendation is Taking profits from dollar bondsespecially those of the Central Bank and rotate them either to instruments in pesos, which continue to have good prospects. Our reading is that the announcements of this new intervention scheme in the CCL is transitory, in some way preparing the ground for a unification. In view of this, the debt in pesos will regain ground against the CCL. A more conservative alternative is to go directly to corporate bonds in dollars or Cedears, which remove all sovereign risk.”