Por fin, un elección importante y idiosincrásico rompe una cadena
Mauricio Macri, the conservative mayor of Buenos Aires, defeated Daniel Scioli, the ruling party’s candidate, in the runoff election in Argentina held on Sunday. So, given everything else that is going on in the world, why does an election in a country that represents less than 1% of global GDP deserve any space? At least, wouldn’t it make more sense to write about the gubernatorial election in Louisiana which represents 1 ½% of the US GDP?
Actually, both elections represent significant changes. Louisiana hasn’t elected a Democrat in any statewide election since 2008, and certainly not a centrist candidate. Argentina has been in the hands of a Kirchner since 2003 during which time there has been a steady deterioration in the economy, understated high inflation, a currency collapse and, ultimately, an inability to access the global debt markets. In the end, populist policies did not overcome the finally recognized impact of corrupt and incompetent governance of a beautiful country with abundant resources and a reasonably well-educated population.
Argentina takes on some level of importance as a possible indicator of a broader shift of governance in the rest of South America. In addition, the country has resources to exploit under a more normal relationship between the producers and the government. This would include shale gas reserves that may represent the second largest known fields on the planet. A portion of these reserves lies in the same region as earlier conventional gas where gathering systems and other infrastructure still exist. Under a different and friendlier government, the technology that would be necessary to access the fields may be more readily available to YPF or in other business combinations. Finally, we will likely see some settlement of the remaining debt that is preventing Argentina from accessing the global credit markets.
None of these elements will occur overnight, but the markets will likely reflect positively the possibility of the ultimate outcomes as suggested above. Macri will have his work cut out for him to reverse the path that Argentina has been on for some time. While he won the election, almost 47% of the voters did support Scioli. Macri will have to take some hard steps in a problematic economy, similar to what Carlos Menem had to do some 26 years ago. There will likely be some ups and downs domestically, including some steps that would appear to be more like the populist actions of the Kirchner administrations. But, the chain of bad governance would appear to be broken.
What may happen more quickly is resolution of the debt situation in order to get access to the global markets, and have funding for whatever actions Macri may need to take to turn the economic situation around. That means that the holdouts from the earlier settlements will see some kind of positive conclusion to their battles. There is the possibility that the settlements will be accompanied by some changes in the covenant structure of sovereign debt in order to avoid a future situation where a small number of holdouts can prevent full closure and access to the capital markets. This will likely raise the cost of debt for other global issuers. This is a speculative observation, but it is hard to imagine a country willingly putting itself in the position of denied access to the capital markets caused by a minority subset of its original creditors, much less the purchasers of the debt on the open markets.
There are many other variables in motion in the markets these days. It remains to be seen if increased QE in Europe will have the same positive effect on the capital markets as it has been having previously. The geopolitical issues and the impact of the terrorist actions on local growth may not be passing events as most such actions have been subsequent to 9/11. There are questions about growth in the US. The employment reports in early December may provide some answers and determine whether the Fed proceeds with raising the Funds rate. We expect that the numbers will be supportive of a Fed move. In general, though, with some exceptions, one could make the case that active management confined to the Americas, North and South, could produce as good a set of returns in 2016 as a more diversified portfolio. We are seeing dispersion among US stocks. The same may apply to Canada as it most likely experiences continuing problems in the energy sector and spreading in the housing and banking sector. With the Argentine election as a backdrop, we may see some interesting but dispersed opportunities developing elsewhere south of the United States. More to come.