Stock-Exchange closed brilliant year

La Nación - January 2nd 2007

Despite the mid year worries of investors and portfolio managers, the 2006 balance is brilliant in reference to financial yields for most of the local and external instruments. The context of global growth, low interest rates, rise of prices of commodities, good domestic fiscal situation and strong global fall in risk avoidance favoured the risk assets, and the Argentine market kept pace with the tendency.

Merval index closed 2006 with a new record of 2090.46 points in pesos and an annual rise of 35%, high above inflation which is estimated to have reached almost 10%. A 19% appreciation of the Merval is expected for next year and it will possibly reach around 2500 points by the end of the year.

2006 started with the positive impulse of 2005 and during the first trimester the Merval broke successive records in an atmosphere of general optimism. But in May the expectations of the investors were blurred and a global run of a few days devastated the accumulated gains.

The strict contractive policy of the Federal Reserve applied as a tool to fight the persistent growth of inflation led to the thought that the American economy could fall into recession. Thus investors were scared away and the losses were major within fifteen days. Merval fell 11% between May 10th and June 1st (half of what it had reached up to that date) and by June 13th it had erased the annual gains and had gone into the red compared to the closing of 2005.

According to Latin Asset Management consultants between June and July $1832 million in funds of domestic shares left the country but between August and December 20th near $ 3500 million returned, thus closing the year with a positive balance of $5550 million.

Francisco Prack, head economist of SBS Group, explained that in the rising process of the last years the markets marked records that were followed by corrections of 10-15%, and then looked for new maximums. “This case was a stock-exchange fall unrelated to the economy and, since the fundamentals of the countries and the companies did not deteriorate, the recovery of the prices was remarkable”.

Thus, the strong global pessimism yielded slowly. Santiago Palma Cané, from Fimades consultant, explained that the fall in the price of petroleum was a key factor. It reduced the expectations of inflation in the United States and strengthened a scenery of soft-landing for that economy.

Analysts agree that the landmark in the way to recovery was the meeting of the Fed on August 8th, when they decided to slow down the rise cycle of the interest rates that had taken the rate from 1% to 5.25% during the last two years. Now the market bets on a rates cut during 2007, based on the data showing a deceleration of the inflationary rate and a cooling down of the growth rate of the industry.

“The pause initiated by the Fed in August meant an additional stimulus for the reigning liquidity, stimulated the positioning in risk assets and increased the volumes negotiated”, Javier Salvucci, analyst for Silver Cloud Investments, explained.

The May experience condemned the market to follow up the American economy closely. All indicators became important and likely to twist the course of investments during a round only to submit to the next datum afterwards. This situation persisted during the next months.

Positive perspective

Generally speaking the perspective for 2007 is positive, although each analyst has a different view of the challenges ahead. For instance, the Central Bank considered in its Monetary Program for 2007 that the economy will grow to a rate greater than 7.4% and that the inflation would not surpass 11%.

Hence, Banco Río forecast for 2007 was an “avalanche of external funds”, considering that “the return of the financial assets looks attractive against that of its Latin American pairs”.

Palma Cané considered that the financial bonanza could extend along 2007 provided the following factors keep up: confidence in a soft-landing of the United States economy; low volatility of the price of petroleum; consistent flow of funds to the United States for buying shares and bonds; and stable confidence of costumers in spite of the cooling down of the American real estate market".

Prack also remarked on the external factors when evaluating the perspective for next year. “We consider that the Fed was successful in surgically puncturing the real estate bubble in the United States without any significant spills to the rest of the economy. We expect rate cuts as from the second trimester. This scenery would extend to next year the appetite for risk that has revalued the emergents the last years”, he said.

On the other hand, Salvucci considered that 2007 is going to be “a year of transition characterized by the political noise of the presidential elections”. And he added: “Given the macroeconomic situation and the advantage in favor of President Néstor Kirchner, the volatility of the market could be inferior to the one of other political processes”.

Mariana de Mendiburu, from Compañía Inversora Bursátil, also considered that the impact of the elections would be limited to a slight increase in volatility, since there is no uncertainty about the results. And Gustavo Neffa, analyst from Macro Securities, considered that the elections will not harm the investments and that they are going to have a positive impact in the market.