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The star investment of the year and the opportunities that emerge for 2024

The main political unknown of the year has been cleared up, and the fixed income market incorporates the expectation of the presidency of Javier Milei in the price of bonds. This reconfigures the “weight race”, and in an environment of notable economic complexity, a 2024 of formidable challenges for the new management, as well as for the investors who They will seek to protect the value of their portfolio and take advantage of opportunities.

For now, the economic team has introduced the first emergency measures of the plan. The minister Luis Caputo announced a series of provisions aimed at avoid a hyperinflation scenario, centered on the fiscal variable as the nominal anchor of the economy. Specifically, as is known, a devaluation of the official exchange rate towards values ​​closer to free contributions, added to a series of measures with the aim of eliminate the primary fiscal and financial deficit.

Let’s see in the following graph the reaction in the price of the different types of bonds to Caputo’s announcements, as well as the accumulated performance during a year of strong political intensity.

Dollar bonds are the star asset of 2023

Return by type of asset, in pesos, according to period.

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As you can see, sovereign dollar bonds are by far the best performing asset. In the year it generated a income of the order of 345.5% for Global bonds and 376.5% in the case of Bonares, that govern under local legislation. In both cases, this was substantially higher than inflation measured by the CER, which was 135.6% so far this year. This position thus generated an attractive real income for the holder, far outperforming all other bonds on the market.

It is also worth emphasizing that The profitability of these bonds was important measured in dollars. They generated a hard currency return of 56.3% in the case of Bonares and 46.1% for Globales, which are governed by New York law. These had a strong push after the result of the election of Javier Milei, with very significant increases in capital.

Second in the weight race are the medium-term CER bonds and Duales, both providing the investor with an attractive hedging instrument against inflation (although not against the official dollar). As can be seen in the table, these instruments had an important performance in the last weeks of economic transition, and in the first days of Javier Milei’s management where Relative price adjustments pushed up short-term inflation expectations. The new monetary policy rate, now in strongly negative territory compared to expected inflation, also provided a perfect combo for investors to seek refuge in these securities that increased up to 60% in the last month alone and 90% in the quarter.

Where are we going: a challenging 2024 for peso holders

Looking ahead to next year, a correct position in the bond market looks decisive again. The economy will face a formidable challengeas the Government seeks to carry out a strong process of adjustment in a framework of extremely high inflation, and extremely deteriorated social indicators.

with a new dollar at $800the competitiveness of the external sector is approaching Convertibility exit levels, something that in principle should favor the positive balance of international trade. The measure has been complemented by a series of additional provisions, such as an increase in PAIS tax of 17.5% for imports, and the incorporation of 15% withholdings for non-agricultural export sectors.

At the same time, a “crawling peg” of just 2% per month with the intention of imposing a bridging anchor until the fiscal adjustment becomes a reality, will in practice generate a risk of loss of exchange competitiveness. In return, the renewed high level of the official dollar offers a cushion for this strategy. The short-term objective is to ration (by price) foreign currency to rebuild reserves, given that the Central Bank started with negative reserves of around US$12,000 million.

In these eight days after the devaluation, the signs were positive: the BCRA It bought almost US$1.9 billion at these prices. He riskhowever, is that the exchange rate appreciates rapidly in the first months and the market anticipates a new devaluation. We believe that the sharp drop in income that the price adjustment brings will prevent a major transfer of the devaluation and, therefore, The drop in economic activity will do its “job”, helping to contain the variables.

At the center of the program is a good execution of the fiscal adjustment, something that is clearly challenging in a context of notable social and political vulnerability. In the short term, the success of the plan depends on the social impact of the aforementioned acceleration of inflation, where a cumulative rate of 50% is expected in the first two months. It remains to see the level of political support that the Government obtains to execute its adjustment policies. In the financial market, the first days were positive with a reduction of the exchange gap to levels of just 20%.

Looking towards 2024, overcoming the enormous challenges of the first stage, the Argentine economy could take advantage great opportunities if it manages to stabilize. The current account imbalance is smaller and the debt comes mainly from the public sector, with the economy as a whole being a net creditor to the rest of the world.

The private sector accumulates foreign assets, which could be poured into the domestic market if the lack of trust is reversed. Furthermore, good weather suggests a good setting for agriculture compared to the historic drought that the economy faced in this last year, and the energy balance will stop consuming dollars to move to a surplus exchange.

Asset Management Director of Criteria

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