Goldman Sachs Asset Management: Argentina Update

What has happened?

• Opposition leader Alberto Fernandez, and his running mate and former president Cristina Fernández de Kirchner (CFK), won the August 11 Primary elections obtaining 47% of the vote. Current President Mauricio Macri and his running mate Miguel Angel Pichetto won just 32% of the vote. 
• This result, a resounding defeat for Macri, was significantly larger than consensus expected, and now makes Fernandez the clear favourite to win the Presidential elections in October this year, with a high probability of this occurring in the first round given he achieved above 45%. 
• Voting in compulsory in Argentina, both in primaries and the general elections, making these results significant.  
• Argentine assets have reacted poorly to these results, as the S&P MERVAL Index dropped 38% on 12th in local currency, while the peso tumbled another 15%.

What does it mean?

• Many market participants viewed this presidential primary election as a litmus test on president Macri’s austerity-driven economic reforms and the larger-than-expected defeat for the ruling coalition has raised concerns around a change in administration and a departure from their more orthodox policymaking. 
• In light of the expansionary fiscal policies that CFK pursued during her presidential tenure, the market reaction highlights concerns of a more negative trajectory of the country’s economic and fiscal policies under the likely future leadership. 
• Over the coming days, announcements from important parties - including from Fernandez, Macri, the BCRA (Central Bank), the IMF, and sovereign ratings agencies - could provide a sense of the ability of policy makers to manage financial market stability in the immediate months and the nature of the likely political transition as we approach year end. 
• We believe Argentine assets could remain under pressure in the lead up to the October 27th general elections. 
• While many Brazilian and other LatAm companies are exposed through exports or subsidiaries, contagion fears remain low, due to Argentina’s minor weight in the MSCI EM index (only 0.35% of the benchmark) and the idiosyncratic nature of the country’s current political landscape.

How are we positioned? 

• We currently see limited opportunities in Argentina on a bottom-up basis. Indeed, the Goldman Sachs Emerging Markets Equity Portfolio has no direct investments in Argentine listings.  
• While some of our companies listed in other markets do have some exposure, we estimate Argentina’s revenue share of the overall portfolio to be below 50 bps. Additionally, given our focus on sound businesses with strong competitive positions, we expect our holdings to be more resilient that the rest of the Argentine market. Hence, we anticipate no meaningful changes to positioning. 
• That being said, as bottom-up investors, we look for businesses that can potentially outperform over the market cycle regardless of political outcomes. We continue to monitor the situation in Argentina, as we believe these market-wide corrections could often provide interesting entry points in to businesses that we like on a fundamental basis.

Source: GSAM, Bloomberg as of 13th August 2019 Past performance does not guarantee future results, which may vary.  The economic and market forecasts presented herein are for informational purposes as of the date of this presentation. There can be no assurance that the forecasts will be achieved.  Please see additional disclosures at the end of this presentation.

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