WASHINGTON, May 1 (UPI) -- Investors who decided last fall that ballots are bullish for Argentina -- meaning, bet on an election-cycle rally -- have enjoyed spectacular gains.
The Merval Index has more than doubled, in dollar terms, since early 2002 and rose more than 30 percent in a matter of weeks. The question now is, when to take profits -- heading into what may be a highly negative campaign for May's runoff election -- with the possibility of a razor-thin margin, vote fraud charges, and a bumpy presidential transition to follow.
The two candidates who survived the first round of voting, though very different personally, are both experienced, market-friendly politicians of the center-left Peronist Party. This suggests a positive outlook, as Argentina not only gets an elected president, something it hasn't had in 18 months, but a fairly solid one.
Nestor Kirchner is governor of Santa Cruz province, located in the far south of the long strip along the Atlantic that is Argentina. Rhetorically, he resembles say Richard Gephardt, a Democratic U.S. Representative from Missouri, in the late 1980s, grumbling about international economic inequities and the need for social spending. Kirchner has governed, however, like the pragmatic Gephardt of the Iraq war debate, keeping his province fiscally sound, and functioning economically, even during several years of vast dislocation for the national economy.
Carlos Menem is the former president of Argentina who pulled the country out of several decades of instability in the early 1990s, and was easily re-elected for a second term. Menem left a residue of personal and financial scandals, though, along with a national economy that collapsed shortly after he left office. His friends blame Menem's successors; their friends blame Menem. In a U.S. context, perhaps a Bill Clinton.
The situation recalls the rise of Inacio Lula da Silva, elected president of Brazil last fall. Note that Lula has completed a fairly spectacular track record in his first months in office, with Brazilian debt and equity markets surging thanks to his Clinton-style approach of wooing the bond market and keeping his center-left base satisfied with small and symbolic gestures but no lurch to Venezuelan radicalism. (See "The Bottom Line" for Oct. 16, which predicted the Brazilian surge.)
Unlike Brazil during last summer's surge by Lula, however, Argentina's stock market has been booming throughout the election cycle. Lula's victory produced a scare and a post-election recovery that in effect has merely restored markets to where they were in early 2002. Argentina has been moving up for more than 12 months, prompting the question, how long can the bull market last? And, isn't a correction due soon?
The answer to the first question is, probably for several years. Having made a necessary adjustment in its exchange rate several years ago, Argentina, like Mexico in 1994, has actually recovered much of the lost value in its stock market. With wages now more competitive across the board, it's poised for continued employment growth.
This long run, of course, depends on who is president in the long run, which means, Menem or Kirchner?
On a micro level, looking at the voters who supported one of the three major candidates who failed to make the cut for the runoff, each of whom garnered about 15 percent of the vote, Kirchner enjoys a strong edge.
Adolfo Rodriguez Saa, president for a week in 2001, was part of the regime that blew up Argentina's fixed-rate currency board after Menem left office. The bulk of his voters will lean strongly toward Kirchner. So will those of lawmaker Elisa Carrio, who campaigned on the single theme of corruption. No candidate from the Peronist Party, as Menem and Kirchner both are, carries a very strong image of probity, but Menem's is far weaker from more than a decade in office under the national spotlight.
Supporters of Ricardo Lopez Murphy, the most market-oriented of the original field of five, will lean to Menem. But even they may not vote for Menem en masse. Menem has high negatives; close to half the voters swear they will never vote for him. ("Some say they won't vote for him twice," a U.S. wag observes, playing on the old election-day motto in Richard Daley's Chicago: "Vote early. Vote often.") Many of those negatives are among pensioners who didn't care for his allegedly loose lifestyle, or the way the economy did blow up, in a way that robbed many of the bulk of their savings, in the wake of the over-exuberant boom.
Despite his slender loss in the first round of voting, then, early polls are likely to show Kirchner with a lead. Look for an early survey with Kirchner at 38-42 percent to Menem's 25-29 percent. Perhaps, like Lula, Kirchner will assume a lead so prohibitive that there will be a quiet campaign and an era of good feelings.
But don't bet on it. Kirchner lacks Lula's charisma and his emotional base of supporters who have spent years in the wilderness with him. Menem is a leader and a fighter, with a Clintonesque joie de politique. The two men are both Peronists, a party rent by bitter divisions in this, what was supposed to be the post-Menem era. Menem will try to raise Kirchner's negatives, and succeed, through attacks. The race will get close and, if close enough, bring charges and counter charges.
What happens to the market in the short run may depend less on the winner of the race -- the two are not so far apart ideologically -- than on the tone of the race. The tone is likely to be negative, at least for a period.
Furthermore, Kirchner is more nationalist, in the narrow sense, and more statist, than Menem. A Kirchner win would mean a more confrontational approach to Argentina's private creditors and the International Monetary Fund. Menem would be more internationalist, as he was in the 1990s in promoting a hemispheric free trade agreement and producing surging capital inflows by linking the Argentine currency to the U.S. dollar and reducing tax rates. But if Kirchner wins, not only the campaign, but the early succession, will be marked by a tone of negativity, and perhaps confusion among international investors.
Situations like the current Argentine political economy are best suited for active trading. Like many investors, my clients have taken profits in recent weeks, perhaps prematurely. But they are waiting to buy a dip in the market in May and June, as a new government, whoever is leading it, confronts the question: "Now what?"
With the Merval in the mid-600s, at best a small position is warranted; the market may barely pause for breath, as it did in 1991-92, but a pause is likely. Assuming a dip into the 500s on a bitter campaign and its aftermath, Argentine equities would be a solid opportunity, and should the savvy Menem pull out a win, a double opportunity. Stay partially invested, but keep a lot of powder dry.
(Gregory Fossedal is chief investment officer of the Democratic Century Fund, managed by the Emerging Markets Group. His firm may hold some of the securities mentioned his articles. Individual investors should contact their own professional advisor before making any decisions to buy or sell these or any related securities.)
