USD/ARS, S&P Merval index at record highs ahead of elections: what next?

October 19, 2023 07:05 PM PDT | By Invezz

USD/ARS, S&P Merval index at record highs ahead of elections: what next? — Image source: Invezz

Argentina election ahead

Argentinian stocks have been in a strong performance this year even as the economy went through its darkest period on record. The MERVAL index, which tracks the 20 biggest companies in the country, has soared by 178% this year in local currency. Its annualised returns in the past five years stands at 75.84%, higher than that of its global peers.

Argentina stocks have jumped as investors hope that regime change and cheap valuations will help to change the economy. It has also jumped as investors remain optimistic about an International Monetary Fund (IMF) bailout. Also, China recently extended a $6.5 billion to Argentina through a currency swap that the two governments face.

Still, Argentina’s equities and the peso face an uncertain future as an important election nears. Voters will go to the election on Sunday to elect their president. The top contenders are Javier Milei of Freedom Advances, Patricia Bullrich, and Sergio Massa. Most analysts expect that Milei will win.

Milei has made some radical promises, including moving to the US dollar and radical changes to the central bank. He has also pledged to reduce government spending in a bid to reduce the budget deficit.

The next Argentinian president faces major challenges ahead. Inflation has surged, the currency has lost its value, while the IMF is waiting for its $43 billion. The agricultural sector, a major part of the economy, has also collapsed. Argentina is now importing food products from the likes of Brazil.

Outlook for Merval and Argentina peso

Merval chart by TradingView

The outlook for both S&P Merval and Argentina peso is uncertain ahead of the election. While the Merval index sits at an all-time high, the ARS has collapsed to a record low.

I suspect that Argentina stocks will pull back in the coming weeks since they have gotten quite expensive. The Merval index has surged by more than 3,210% from the lowest level during the pandemic. In most cases, such parabolic moves end with a reversal as they enter the distribution phase of the Wyckoff Model.

The Argentinian peso will remain under pressure after the election, especially if Milei wins. Analysts are sceptical about how he will implement dollarisation since the country needs to have resources to achieve that. Therefore, the USD/ARS pair will continue soaring, with the official rate expected to get to 400.

The post USD/ARS, S&P Merval index at record highs ahead of elections: what next? appeared first on Invezz

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