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SPI Management Newsletter 24.11.23

Milei's Potential Impact on Argentina's Economy

Election of Javier Milei as Argentina's president signals a dramatic shift in the nation's governance, with the possibility of unprecedented economic changes. Milei, known for his “anarcho-capitalist” views, proposes radical economic measures like replacing the Argentine peso with the US dollar and significantly cutting government spending. Such drastic steps, if realized, could greatly disrupt both Argentina's internal dynamics and its global economic relations.

Milei's ascent also signals a broader shift in the geopolitical stance of Argentina, a G20 member and aspiring BRICS entrant. His administration could reverse the country's current financial trajectory, including its engagement with China and efforts towards de-dollarization. However, Milei faces considerable challenges in implementing his ambitious agenda, particularly in gaining legislative support for his economic plans.

Internationally, Milei's harsh rhetoric towards China and Brazil, and his threats to exit the Mercosur trade bloc, pose significant diplomatic challenges. Yet, Mercosur's struggles as a catalyst for economic growth and its protracted negotiations for an EU trade deal provide an opportunity for re-evaluation. Argentina's participation in the bloc and its stance on the EU-Mercosur deal could potentially be reshaped under Milei’s leadership.

Despite financial markets' optimistic response to Milei's potential presidency, his minimal congressional representation necessitates alliances, notably with supporters of former President Mauricio Macri. Macri's moderate economic liberalism might influence Milei towards a more balanced approach, potentially salvaging some economic rationality amidst Argentina's long-standing challenges of inflation and stagnant growth. Realistically, Milei inherits a legacy of economic turmoil, and like predecessors, his administration risks failure amidst high inflation and a weak currency. Yet, if Milei can strategically choose his battles and allies, there remains a slim possibility for successes, such as advancing the EU-Mercosur trade agreement, despite the odds.

Investors Abandon Dollar Amid Expectations of US Rate Cuts

Investors are rapidly offloading their dollar holdings, betting that the US Federal Reserve's rate hike spree has reached its zenith and anticipating rate cuts in the coming year. According to State Street, asset managers are set to divest 1.6% of their open dollar positions this month, marking the largest monthly outflow since the previous year. This sell-off has been fueled by underwhelming US job data and expectations of a policy shift.

The dollar's decline, on course to be the most significant in a year, suggests a broader trend among investors to scale back on US assets as investors are rethinking the need for dollar holdings in anticipation of rate cuts. This shift mirrors a similar pattern last November, followed by a 10% weakening in the dollar index by January end.

Despite the recent reduction, investors still maintain an overweight position in dollars compared to other currencies, hinting at the potential for further dollar depreciation. Last year's bull run in the dollar, driven by Fed rate hikes, has reversed recently as robust economic data no longer support prolonged high rates.

The change in market sentiment is evident as the dollar index, after a strong performance earlier in the year, has returned to its starting point, and futures markets are now forecasting over 0.5 percentage points in Fed rate cuts by next September.

November has seen the yen strengthen by about 1.5% against the dollar, a trend expected to continue with the Bank of Japan likely abandoning its negative interest rate policy soon. Emerging markets, too, are set to benefit from a weaker dollar, easing the repayment of dollar-denominated debts and potentially attracting investors back after significant sell-offs this year.

Investment managers are adjusting their strategies accordingly, favoring emerging market equities and commodities over US stocks. The MSCI Emerging Markets Index has risen 3% this year, lagging behind the US S&P 500's 19% increase.

In summary, investors are recalibrating their strategies in response to changing US monetary policy and global geopolitical shifts, leading to a significant move away from the dollar and a renewed interest in emerging markets.

Adapted from WSJ, FT, NYT, Reuters, CNBC, Bloomberg

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