While most traders are waiting on the sidelines, anxious about the election and unsure of libertarian frontrunner Javier Milei, some daring bond investors are moving in.

Their gamble is that a more market-friendly government is likely to emerge from the Oct. 22 vote, whether it is headed by Milei, Patricia Bullrich, the main conservative rival, or Economy Minister Sergio Massa, the candidate of the ruling left-of-center Peronist coalition.

"Two thirds of the country is voting for pretty substantial fiscal consolidation, which, as a bond investor, we're obviously quite keen on," said Christine Reed, a New York-based portfolio manager at global investment manager Ninety One.

Reed said the investment firm had increased its allocation to Argentina since Milei's shock first-place finish in an open primary election in August, though she conceded the risk was high after a history of sovereign debt defaults - the ninth came in 2020 - and falling bond prices.

"There has been a lot of pain from being invested in Argentina over the past decade," Reed said. "The people who are still around have most likely lost money at one point or another."

Milei, an economist and member of Argentina's lower house of Congress, wants to sharply cut spending, ease stringent capital controls and eventually dollarize the economy. The moves, in theory, should be positive for markets, but could be hard to pull off in an economy beset by triple-digit inflation, negative net foreign currency reserves, rising poverty and a sliding currency. A $44 billion loan program with the International Monetary Fund (IMF) also is wobbling dangerously.

Bullrich, who was a minister in former President Mauricio Macri's market-friendly government, is also pledging to cut the fiscal deficit and halt money printing. Massa, who represents a more centrist bloc in the ruling coalition, has pledged a zero deficit for 2024, though he has opened the spending taps recently to bolster his election hopes.

Rob Citrone, founder of U.S.-based hedge fund Discovery Capital Management, said Argentina presented one of the best opportunities in emerging markets.

"They're supporting someone who's very radical in his views in terms of a real free market and a smaller government," he said of Milei. "These are very liberal ideas from an economic perspective, so I think it's a generational change."

UNPOPULAR POPULISM

A key takeaway from the August primaries for investors was the perceived weakness of Vice President Cristina Fernandez de Kirchner, a left-wing populist and former two-term president who has long butted heads with investors.

Fernandez de Kirchner, who established currency controls and presided over a sovereign debt default during her presidency, has taken a back seat in the run-up to the election.

After recently hosting an investor trip to Buenos Aires, BancTrust & Co analysts said the main takeaway from meetings was "confirmation that the focus of the policy debate has shifted to a market-friendly framework."

"We also found a consensus that Kirchnerism would progressively exit the center of the political stage no matter who wins the elections," they wrote in a note.

DEPRESSED PRICES

Argentina's bond prices in cents on the dollar trade between the high 20s and low 30s - far below even countries currently in default, like Ghana or Sri Lanka, which trade in the mid 40s.

The depressed values offer another reason to be bullish on Argentina's debt, said Thomas Haugaard, a portfolio manager on the emerging markets debt hard currency team at Janus Henderson Investments in Copenhagen.

"We have a small overweight in Argentina, but it is probably more of a valuation argument right now than it is a very clear baseline scenario," Haugaard said. "I think most investors are struggling a little bit to figure out what is the baseline scenario."

There is also lingering concern over a possible Milei administration, given his party would likely face a hostile and divided Congress that would try to obstruct any proposed reforms.

Morgan Stanley said in a recent note that it wasn't yet time to turn bullish on Argentina, despite a recent drop in bond prices, though a "path to the bull case scenario remains."

Armando Armenta, an analyst for Latin American fixed-income and currency markets at AllianceBernstein in New York, said it was a mixed picture.

"The performance of Milei and Bullrich as signals of a demand for change from the current unsustainable policies should be welcomed by investors," he said.

"However, Milei's plans and ability to deliver such change were he to win are not clear yet, moderating the positive impact from the expected outcome."