Three Things Argentina’s Bondholders Will Look for in Primaries

Argentina’s presidential primaries will offer the first clues about the outlook for ending a decade-long legal battle with creditors that has shut the country out of overseas bond markets.

For investors including hedge-fund titans such as George Soros and Daniel Loeb, the Sunday vote will be a sign of what to expect when the country holds elections Oct. 25, analysts say.

 Polls show opposition candidate Mauricio Macri and front-runner Daniel Scioli will win their respective contests. Examining the combined votes from all the primaries will allow analysts and investors to get an idea of how the candidates may fare in the national election.

Argentina’s benchmark bonds have soared 16 percent in the past year on speculation President Cristina Fernandez de Kirchner’s successor will unwind policies that have landed the country in default for the second time in 13 years and stoked inflation.

 In recent months, Scioli has aligned himself more closely with Fernandez, a fellow party member, fueling concern he may not be quick to usher in the changes investors want.

Here are three scenarios for investors to consider:

NOTE: We’ll quantify support for the opposition as the total votes for the Cambiemos Party, which includes market-favorite Macri, Elisa Carrio and Ernesto Sanz.

1. Scioli gets more than 45 percent of the total votes in the primary, or 40 percent while holding a 10 percentage point lead over the opposition: Markets probably won’t react well. That’s because those are the tallies Scioli will need to win outright in the first round of presidential elections and avoid a run-off. Current polls indicate he probably won’t get 45 percent of the vote on Sunday.

“Markets will be disappointed if Scioli has enough to win in the first round, but I personally think that’s the wrong way to read it,” said Daniel Kerner, the head of Latin America research at Eurasia Group in Washington. “Scioli will have support of most of the Peronist party, so politically he’ll be in a better position to make adjustments when he needs or wants to do them.”

2. Scioli gets less than 40 percent of total votes and has a lead over the opposition of less than 10 percentage points: This result may spur a market rally as investors speculate Scioli will face Macri in a run-off. Banks including Morgan Stanley say this scenario is the most likely. Polls show a head-to-head vote would be close, with at least two surveys indicating a Macri victory.

For the market to be “super bullish,” Scioli’s lead over the opposition may have to be seven percentage points or lower, said Luis Caputo, president of Axis Inversiones in Buenos Aires. “If you can assure the market that there will be a second round, it’ll rally hard. Macri will have a real shot, and that’s a game changer.”

3. Investors will also be watching the vote totals for other candidates -- especially dissident Peronist Sergio Massa, who trails both Scioli and Macri in polls. If he doesn’t drop out after the primaries, his presence in the general election may siphon votes from both candidates, making a run-off more likely. The big question is where Massa’s votes would go after the first round.

Like Macri, Massa has called for changes in policies, but because he’s a Peronist, the majority of his votes may end up going to Scioli, according to Alberto Bernal, an economist at Bulltick Capital Markets. “That’s why I think Scioli will win,” he said. “But it’s not going to be a walk in the park.”

bloomberg.com