On Aug. 13, after Argentina’s primary elections took a different direction than markets expected, the country’s stocks suffered one of the most dramatic crashes in global history.
“It was a super unusual reaction,” says Jim Barrineau, head of emerging market debt at Schroders Investment Management Ltd. He notes the market crash was especially bizarre because it had no solid reasoning behind it. But for institutional investors looking at the country, the fundamentals haven’t changed, he adds.
The event itself came on the heels of the country’s presidential primaries, which decided the parties that will participate in the presidential election in late October. Left-wing opposition leader Alberto Fernandez received much more support than was initially anticipated, says Barrineau. “The context was completely unexpected because all of the data and all of the polls were moving in the direction of the incumbent [Mauricio] Macri.”
The crash was all the more extreme because it lacked a solid cause, says Barrineau. “At the end of a popularity contest like this, nothing like this is warranted in terms of price action.”
And it wasn’t just stocks. Bonds were crushed and Argentina’s currency tumbled as well. “It’s a shock to the system because of that, and it happened, maybe, at the most illiquid market time of the year,” he says. “And asset prices just fell and there were some large indiscriminate sellers and then everybody panicked.”
Institutional investors are likely to have some exposure to Argentinian debt products as part of the larger emerging market segment of their portfolios, he says.
In the days after the shock, markets have begun to slowly rebalance, says Barrineau. “We think the market needs some time to gain its senses. In a couple of weeks, there will be more liquidity in the market as everybody comes back from vacation, [and] we expect things will settle down a little bit. But there’s no question that the odds that Macri will win the election come October are objectively lower than what they were . . . because he’s been resoundingly rebuffed at the ballot box, even though there have been no practical consequences. But he [doesn’t have] a zero chance of gaining re-election, which is what the market has been perceiving over the past couple of days.”
However, he emphasizes, the International Monetary Fund is deeply invested in ensuring the continued success of Argentina, to the tune of US$56 billion. And while the possibility of more left-wing leadership could cause worries about the government’s commitment to austerity measures, the idea that Fernandez will harm the situation is somewhat overblown, he notes.
“There’s no incentive for Fernandez to default or create any additional volatility in the markets and there’s certainly no incentive for the IMF to stop working with Argentina. And the key thing for people to remember is that Argentina doesn’t need to really pay back any debt through 2020. So the IMF has the country covered for the next 17 months or so. We think cooler heads will prevail and we’ll begin to get a better idea of the direction of policy and the direction of market sentiment in the coming weeks.”
One potential reason for the extreme market volatility is Argentinians’ awareness that it has defaulted on its sovereign debt several times this century, adds Barrineau. “They have that overhanging the country. And it’s relatively fresh in the minds of Argentines. So when they smell volatility, the last thing they want to do is hold their currency; the first thing they want to do is move into U.S. dollars. So they’ve been conditioned by history to do that. So then I think things get exaggerated.”