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How did the market react to the May Pact?

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How did the market react to the May Pact?

President Javier Milei announced on Friday before the Legislative Assembly, in his speech opening of ordinary sessions in Congress, that will summon the governors of the 23 provinces and the City of Buenos Aires to the May Pact, an agreement on 10 essential points to “refound the country.”

Despite the criticism that he always had with politicians, the new head of state challenged politicians to reach agreements. In this sense, he proposed celebrating a pact with 10 principles to refound the country.

The communion of Javier Milei and the red circle, behind the May Pact

The reaction of the markets

In the session on Monday, March 4, if we analyze what happened with the Argentine ADRs listed on the New York Stock Exchange, the truth is that, in the first hours of the session, the most benefited sector had been the banking sector, with increases up to 7% in dollars for the Supervielle Group (SUPV), BBVA French (BBAR) and 6% for both Galicia Financial Group (GGAL) and the Banco Macro (BMA).

It is also important to highlight that this is a sector that had been performing great in the first part of 2024, which responded in part to the fact that it was one of the most backward sectors in what has been the market’s bullish rally. Argentina in recent years.

After the speech in Congress, the market opened celebrating with increases in stocks and bonds

Nevertheless, As the hours passed, the initial optimism of the wheel faded and the truth is that after a very positive opening of the ADRs, the market finally ended up closing in a mixed manner.

On the fixed income side, sovereign bonds in dollars did manage to consolidate the initial rise and registered increases of an average of 2% in US dollars.

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Regarding financial dollars, optimism also remained and the MEP dollar registered a drop of 2.3%, while the CCL dollar fell 2.4%, in what are performances that continue in line with what was the month of February, where dollars had a significant correction.

What can we expect going forward?

At first, one might think that The market reaction in the next sessions could be similar to that of the Omnibus Law projectwhere sand perhaps generated too much expectation for something that, from the beginning, was difficult to happen, since the ruling party is a minority in both chambers.

However, perhaps the most optimistic position can be read as The government seems to be putting aside its most conflictive position with the Legislative branch and the governors.and will be more willing to generate consensus, as long as it is in line with their long-term objectives.

Energy and agriculture emerge as the two sectors that could have the best local performance.

Although It is most likely that not all proposals will come to fruition; the truth is that the simple fact of setting up a debate to generate a consensus is already significant. At the same time, if some of the ten measures are achieved, such as, for example, the non-negotiable fiscal balancecan already be defined as a very important advance for the country’s macroeconomy in the long term.

What to position yourself on?

thinking aboutlocal assets which we consider could be attractive in the long term, we believe that the agricultural and energy sectors would benefit, these are two sectors with fundamental importance for the future of the country, which can provide foreign exchange income that will be necessary for the new mandate. Along these lines, the three local assets that we suggest under this premise are Cresud (CRES), Pampa Energy (PAMP) y Central Puerto (CEPU).

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Cresud (CRES): Although the 2023 agricultural campaign was seriously impacted by the drought, it is expected that the current campaign will be better, and in the event of an eventual exchange rate split/unification, exports will be able to be settled at a more competitive exchange rate, positively impacting their income. .

It is a company that has investments in Brazil through its subsidiary BrasilAgro, in Paraguay and Bolivia. It has a 27% stake in its subsidiary Irsa, gaining exposure to the Real Estate sector. The diversification of its assets, income tied to the dollar, and experienced management make it attractive.

Pampa Energía (PAMP): It is one of the main companies in the Merval leading panel. Pampa is one of the leaders in the Oil & Gas segment, it has an approximate production of 5,5500 barrels of oil and 10 million cubic meters of gas per day.

In addition, it participates in the generation and transmission of electrical energy, making it the largest integrated electricity company in Argentina. We understand that Pampa is a company that cannot be included in a portfolio, due to its solid fundamentals, but also because part of its income comes directly in dollars from exports, which positions it as an alternative to hedge against exchange volatility.

Central Puerto (CEPU): Company in the energy sector, present in the generation of electrical energy and production and distribution of gas, among others, is trading at valuation multiples that present an attractive entry point if rates are deregulated in the sector to which it belongs.

We believe that the new administration will have to rearrange the relative prices of the economy and the rates will undergo adjustments that will allow it to improve its income, which is impacted by operating costs that are not covered, while its income does. It is a company that generates a lot of cash, and allows it to acquire strategic plants, which is why we see value in the event of an eventual adjustment.

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* Research Manager en IOL invertironline.

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