In the uncertain financial environment that Argentina is going through, we detected three major risks for investors: exchange rate, inflation and the sovereign. With the goal of protecting capital and seizing opportunities that arise amid uncertainty, this article explores each of these risks and proposes hedging strategies for each.
Exchange Risk
The net reserves of the Central Bank are already in the red for more than USD 1,000 million and, in a context of severe drought, it does not seem that this will be reversed without a price adjustment. With the increasingly tense foreign exchange market, a jump in the value of the official dollar seems inevitable in the next 12 months. We recommend taking coverage.
We distinguish two ways of capitalizing on an exchange rate jump: 1) Directly with bonds tied to the official or dual exchange rate, tied to the maximum between inflation and devaluation. 2) Indirectly through CER bonds tied to inflation, which should rise due to the transfer to prices of a devaluation.
It is not only important to take into account the size of the devaluation jump, but also the moment in which it occurs. It is key to pay attention to the maturity date of each bond, since the jump is more likely to occur at certain electoral milestones: the PASO, the general elections in October, a potential ballot in November or the assumption of a new management in December.
The government is willing to use all the financing windows it has left to avoid a disorderly adjustment of the variables, so we rule out a foreign exchange event prior to the STEP.
Based on this, our recommended instruments for currency hedging are: the dual bond for September TDS23, the dual for February TDF24 and the CER T2X4 bond. Having said this, we highlight the importance of diversifying the portfolio with dollar-linked corporate instruments through Mutual Investment Funds.
inflationary risk
The high levels of inflation that persist in the country create a very challenging environment to maintain positive real returns.
With the high-frequency indicators skyrocketing, the most optimistic private estimates place the data for May at levels of around 9%. That is, the data could perfectly exceed two digits per month. May would have incorporated part of the exchange rate run at the end of April, rate increases, parities and a powerful inertia, having registered 8.4% in April.
Regardless of the efforts that may be made to control it, we believe it is unlikely that inflation will decrease significantly and we expect a floor of close to 8% per month for the rest of the year, which would place inflation in 2023 close to 150%.
In view of this, we recommend establishing short-term positions with bonds and CER bills, linked to inflation. We highlight the T2X3 bond, for which we project a TNA of 112%, 5 points above a fixed term.
We prefer T2X3 over the rest of the CER instruments as, at maturity in August, it is long enough to capture an upside in nominality, and short enough not to be exposed to significant election risk.
Sovereign Risk
One of the most recurring fears in Argentine investors is the occurrence of very pessimistic scenarios. In recent times, we have seen a significant increase in the demand for coverage against extreme events such as dollarization, hyperinflation, restructuring, splitting, or similar situations.
For our part, we believe that, as with plane crashes, investors tend to overestimate the probability of these events. This is due to the influence of cognitive biases and media attention. However, the Argentine record does not play in favor of our argument.
That said, dollarizing the portfolio with corporate bonds is presented as an alternative to get through 2023 minimizing risks. As they are backed by the solvency of the issuing companies, they reduce exposure to sovereign risk and offer greater security and stability than Treasury bonds. In addition, since they are denominated in dollars, they also protect against the deterioration of the Argentine peso.
In this sense, we recommend the YPF bond to 2026 guaranteed by exports, the Transportadora de Gas del Sur bond to 2025 and all Pampa Energía bonds.
For more moderate profiles, we also recommend unsecured bonds from YPF, Aeropuertos Argentina 2000 and Mastellone 2026.
Fixed Income Strategist at Cohen Aliados Financieros.
Source: Ambito
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