International Business : Argentine Stock Market Favors Menem in Upcoming Election : Politics: The country’s economy has shown marked improvement under his administration.

If Sunday’s election in Argentina were up to the country’s stock market, President Carlos Menem would win just about every vote cast.

The applause that brought Economy Minister Domingo Cavallo near tears during a visit to the market last year was a stunning example of investors’ gratitude for the stability that the Menem Administration has brought to a country where inflation ran at 200% per month just five years ago.

Argentina’s four-year economic turnaround, based heavily on an appeal to foreign capital, has helped the country’s stock market come of age and placed it squarely on the map of the world’s leading emerging markets.

“The most important change in recent years has been the globalization of the market,” said Patricio Persivale, general manager of the Buenos Aires brokerage Provincia Bursatil.

But equally important, analysts say, were the reforms brought by Menem and Cavallo, including opening up Argentina to international trade and investment, restructuring the country’s foreign debt, getting the country’s fiscal house in order and making the peso convertible with the dollar.

After the reforms were introduced, Argentina’s economy started growing and inflation fell, to about 4% last year.

Meanwhile, stock market volume swelled. A tiny 2 million Argentine pesos were traded daily when Menem took office in mid-1989. By 1992, that had swelled to 100 million. Since Mexico’s economic crisis, it has fallen, averaging from 20 million to 30 million pesos a day. (An Argentine peso roughly equals a dollar.)

“Argentina was able to join this globalization process thanks to the restructuring of its foreign debt under the Brady plan, and to its very important economic reform program,” said Monica Erpen, a derivatives specialist at the National Securities Commission.

The reforms were put to the test this year as the backlash of Mexico’s economic crisis sent stocks reeling in Argentina and other emerging markets.

While bruised--the country’s blue-chip Merval stock index is off 25% from its December highs--Argentina’s market is recovering, and changes are planned for later this year that could further boost the level of trading.

Sunday’s elections may deal stocks yet another short-term blow if the vote goes to a second round--a possibility that the latest polls show is less than remote.

The Peronist Party’s Menem hopes to win a first-round victory against his second- and third-place rivals, the center-left Frepaso alliance’s Jose Bordon and the Radical Party’s Horacio Massaccesi. Bordon is the main challenger.

But the longer-term outlook is positive, analysts said. New regulations on financing mechanisms have led to a boom in corporate bond issues, and a flurry of sales of state-owned assets has also bolstered the market.

The sale of the state telephone firm Entel, whose services were taken over by Telecom & Telefonica, resulted in the listing of two heavyweights on the market in mid-1992.

But the market’s benchmark was to become YPF, the oil giant whose international public offering in mid-1993 powered the market’s recovery after a prolonged bout of profit taking.

Today, the telephone stocks and YPF, along with leading banks, car makers and utilities, are all traded as American depositary receipts, or ADRs, on Wall Street. YPF is often one of the 10 most active issues on the New York Stock Exchange.

To be sure, Argentina’s stock market has had its share of ups and downs.

“There was a mad streak of profit taking after the first surge brought by convertibility, which slashed the Merval index from 900 to 300 between June and November, 1992,” broker Luis Corsiglia said. “The entry of capital was disorderly, and so was the exit.”

The market recovered, but then came rising U.S. interest rates and the Mexican economic crisis, both of which hurt Argentine stocks. The Merval, which stood at 530 before the Mexican crisis, closed Monday at 393.39.

The market has incorporated a computer-assisted system to allow automated order matching--a common practice in Sao Paulo’s stock market, which is a key competitor for capital.

New anti-takeover rules and controls on insider trading have also been introduced.

Will all this bring the market back to its former volume?

“Greater volume does not depend on Menem. It depends on a change in tack by the big foreign portfolio managers. Obviously, it helps if the government does things properly, if its plan is credible and if Menem is reelected,” Persivale said.