16 October 2017 Special Report: Argentina - Position for the upturn Argentina: Position for the upturn Introduction Upside surprises - lackluster market response. Argentina's FX and fixed income markets have had a muted response to the recent upside surprises in both domestic activity and better-than-expected primary results / electoral polls since the PASO. Rather than a sign of market skepticism we find this consistent with the new stage of the cycle the economy finds itself in, where the growth is accelerating but amid a very gradual improvement in fiscal accounts, a widening current account deficit and persistent inflation. Asset selection becomes more important. The improvement in growth outlook is more clearly reflected in the 40%+ returns in equity markets and outperformance of Argentina's external debt. Meanwhile, inflation inertia and the still high pace of issuance have underpinned the lackluster performance of the peso and local fixed income in recent months. The gradual improvement in macro conditions we foresee slows re-pricing and highlights the importance of relative value at this stage in the business cycle. In this report, we review recent macro developments and outlook, and discuss how to position for this stage in the cycle. Politics and policy mix support (tactical) carry in local markets and duration in hard currency The October mid-term elections will likely confirm the expected gains by Mach's coalition. The race in the key (and normally a leading indicator) BA province shows the incumbent's candidate leading by almost 5 points. Also, the main Cambiemos leaders still enjoy favorable ratings - especially Governor Vidal (near historical highs) - while Cristina Kirchner's rejection rate is on the rise. Local polls also suggest - despite limitations - that Cambiemos may win in the province of Buenos Aires, the city of Buenos Aires, Cordoba, Mendoza and Santa Fe - the five largest electoral distri