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Friday, March 31, 2023

Is it time to dollarize the investment portfolio?

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January started with a inflation of 6% and the expectations for February and March are not better. Inflation for February is between 6 and 6.5% and March’s could be even worse. So it seems very unlikely that the 2023 inflation rate will drop significantly compared to last year’s 96% (at this rate it will possibly exceed it). With this context and in a scenario that will be crossed by the presidential elections, we must be extremely analytical and interpret the effects that the internal front (shortage of dollars due to the drought and problems with the debt in pesos) and external (increase in interest rates for part of the Fed and possibility of recession) may have on our investments and what will happen in 2024.

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The big unknown is what will happen to the exchange rate in the remainder of the year and in 2024. With few reserves (which should grow), the market is already discounting a new soybean 3 plan, although the impact of this will decrease because it also Due to the drought and the low availability of foreign currency, the approach to a possible transfer of government makes the producer see the possibility of unifying the exchange market, and those who can decide to retain their production. Massa recently announced support for regional economies, starting with viticulture with a wine dollar plan.

The wholesaler rose 5.5% in February (the same as in January), and once again fell below inflation. It seems that the Government does not want it to be on top. Today we do not see that the Government is going to make a discreet leap from the wholesaler before the elections (it is going to continue with the crawling peg). After the elections, it would only do so through an agreement with the opposition (and we don’t believe that will happen either). We don’t know what the next government is going to do, and that is reflected in the jump in the implicit future dollar rates starting in December.

Find out more – The inflation in February is worrying: will the Government be able to control the escalation of prices?

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With the new government, the currency purchase restriction model is exhausted with an exchange rate gap of such magnitude that it makes it difficult for the private sector to develop sustainably. The opposition could choose to completely remove currency controls from the beginning or do it gradually (for the moment Rodríguez Larreta, who is emerging as the main candidate, indicated that he is not going to lift the stocks as soon as he takes office). To do so from day one, a forceful economic program is necessary that demonstrates an Argentina that can grow with a primary fiscal surplus to gain confidence and generate investment. Otherwise, with the stock of commercial debt accumulated, removing the restriction could produce a run towards the dollar with the aim of canceling trade balances (and the BCRA has no reserves to stop it).

Learn more – Market worsened inflation forecast: expect more than 6% for February and almost 100% for 2023

If we adjust the CCL dollar for the growth of BCRA liabilities, it would have to trade at $431, 17% higher than today. This is where we see the possibility of dollarizing portfolios; For conservative-moderate profiles, Corporate Negotiable Obligations can be acquired while investors with an aggressive profile can take advantage of the low parities of sovereign and some sub-sovereign bonds in the event of an electoral trade. The October-January rally and the recent sell-off do not seem to be a local reason, but rather better explained by the international market situation.

With this in mind, by 2024, if the new presidential term gains confidence in its program, it can cause the price to jump, although it must be taken into account that this instrument is quite risky due to the volatility it presents. On the other hand, we do not see that it is the moment to invest in Cedears due to the uncertainty about the North American economy. If inflation does not come down, the Fed would be forced to raise rates above what is priced by the market and keep them high for longer; while there is also the risk that restrictive monetary policy will lead to a recession, worsening company results. We consider it prudent to wait for more clarity about whether the economy is headed for a “soft landing”, a “hard landing” or a “no landing”.

Wise Capital Financial Assets Analyst

Source: Ambito

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