ANALYSIS-Argentina investors bet on Milei's popularity a year after his election

By Rodrigo Campos

NEW YORK, Nov 18 (Reuters) - Investors who have been rewarded for their bets on Argentine President Javier Milei are doubling down on the country's stocks and bonds even as they hit records, betting that an austerity crusade will pay further dividends.

Milei won the presidential election a year ago with a mandate to reshape South America's second-largest economy, pledging to take a chainsaw to government spending and slam the brakes on printing more pesos.

A renegade campaign endeared him to Argentines fed up with the establishment, and with just enough legislative support to withstand a veto override, Milei pushed through a key reform bill that included steep spending cuts. The government recently marked its tenth consecutive monthly primary fiscal surplus. A tax amnesty has brought some $18 billion to local banks.

Milei's swift initial move to cut spending and stop printing cash was "one that investors can very easily buy into," said Graham Stock, emerging markets senior sovereign strategist at RBC Global Asset Management.

What is surprising, he said, "is that the population has bought into it, and that has meant that his popularity has held up pretty well. Given the scale of the spending cuts, it's pretty remarkable that he remains as popular as he does."

A survey closely watched by markets from the Torcuato Di Tella university showed confidence in government, a proxy for Milei's standing, rebounded in October after a September slip. Going back to 2003, only Peronist Nestor Kirchner and center-right Mauricio Macri scored better than Milei at this point of their term.

Other surveys show Milei's popularity and disapproval ratings at around 50-50.

Argentina is in the second year of a recession, with the International Monetary Fund estimating a 3.5% contraction in economic output this year. At the same time its dollar bonds .JPMEGDARGR have returned almost 90% this year, and the local stock market .MERV is up 125%.

But inflation remains at triple digits and the peso has weakened 19% this year, even if supported by currency controls, so most workers still struggle with the cost of living. More than half of Argentina's 46 million people live in poverty.

THIS TIME IS DIFFERENT

Macri's presidency also attracted investors to Argentina's financial assets, with stocks hitting record highs starting in 2015 and buyers lining up for a 100-year bond issued in 2017. It ended in tears - and default - after the economy stalled and inflation surged, paving the way for the Peronists to return.

But Argentina bulls insist history is not about to repeat itself.

"I think there's a lot of confidence that if there is a path towards normality, this is probably the only administration that could do it," said Thomas Haugaard, portfolio manager of EM debt at Janus Henderson.

"I'm not saying that they will be able to do it, but there is a shot at it, and they have proven it without too much unrest on the streets."

There have been some street protests, especially over cuts to university budgets and when an increase in pension pay was blocked. But the government's focus on inflation has addressed a major popular concern. As monthly consumer prices decelerated in October, JPMorgan updated its end-2025 inflation target for Argentina at an annualized 29%, which would be the lowest since 2017.

"I think it comes down to how fast Milei will be able to get the turnaround," said Gordian Kemen, head of EM sovereign strategy (West) at Standard Chartered Bank. "Will he be able to generate enough jobs, enough well-being for the electorate before it comes to the midterm election?"

Argentina's October 2025 midterms, which will decide half of the seats of the lower legislative Chamber of Deputies and a third of the Senate, will provide a key barometer of his chances of not just enacting his economic plan but becoming an established political force.

"I'm not saying that Milei has to be at peak popularity at all times. I'm just saying that you don't want to see him become unpopular for some reason," said Shamaila Khan, head of fixed income for Emerging Markets and Asia Pacific at UBS Asset Management.

"What we're watching is that there is nothing that hinders or deviates from the policies that the country has been pursuing. The possibility that the country doesn't need another restructuring is slowly starting to get priced in."

Some investors are hoping Argentina will get an additional market boost from the president's newfound alliance with U.S. President-elect Donald Trump, whom Milei met in Florida last week. He was the first foreign leader to meet the Republican since he won the election.

"There should be close policy alignment between the U.S. and Argentina, and that should translate into the U.S. supporting Argentina for various issues, including IMF renegotiations," said Standard Chartered's Kemen.

Argentina's payments to the IMF are set to almost quadruple in 2025 to just over $3 billion, and increase annually to near $9 billion in 2028. That should not be a problem for a $600 billion economy, but building up dollar reserves remains an issue.

Yet investors take comfort from the approval of a $57 billion IMF program during the first Trump presidency.

"They have huge financing needs coming up. They need more money from the IMF and at some point they need market access," said Janus Henderson's Haugaard.

"In Argentina you're getting more comfortable with the management of the country, but it is not 'I buy Argentina, I put it in a drawer and I sleep'. This is, of course, something where dynamics can change quickly."

(Reporting by Rodrigo Campos; Editing by Christian Plumb and Richard Chang)

((rodrigo.campos@reuters.com))