UPDATE 1-Emerging market specialist Ashmore sticks with Argentine debt even as default fears simmer

(Adds details on Fernandez, pictures)

By Tom Arnold

LONDON, Sept 25 (Reuters) - British emerging markets investor Ashmore Group is betting that Argentina's current crisis, that has seen the country veer towards default, is not as bad as it looks.

The investment manager is buying Argentina's dollar bonds in the belief the clear favourite to win next month's general election, Alberto Fernandez, will be less radical in overhauling the government's debt than markets now expect, one of its executives said on Wednesday.

Argentina's bonds and currency plummeted to record lows last month as investors fled after left-leaning Peronist Fernandez heavily defeated President Mauricio Macri in a primary election, prompting the market-friendly incumbent to unveil plans to delay debt payments and impose currency controls.

Ashmore was one of several foreign fund managers holding Argentina debt heading into the market meltdown and had 10.5% of its $1.4 billion short-duration emerging-markets fund invested in Argentina at the end of June, Morningstar data show.

It still has exposure to both international and local bonds, said Jan Dehn, head of research at Ashmore.

"Yes, the fundamental outlook is worse as there's more uncertainty about what Fernandez will do when he becomes president, but the bonds are now pricing in an extreme version of what Fernandez may do," he said.

"My view is that we will see a more moderate Peronist party emerge under Fernandez than what the market is currently pricing in, that's why there's value in the (international) bonds."

Alberto Fernandez, seen as a pragmatic figure within the broad Peronist political flank, is running with ex-President Cristina Fernandez de Kirchner, a divisive figure who pushed interventionist policies during her two terms from 2007 to 2015.

Ashmore's buying activity contrasts with some other fund managers who have been seeking to pare back exposure.

"We have been reducing risk all year in Argentina and have no active risk in local currency and zero underweight in sovereign dollar bonds," said Brett Diment, head of global emerging market debt at Aberdeen Standard Investments. "We think pretty big challenges remain in Argentina and some sort of a debt extension is inevitable. Whether we also get principal haircut or reduction coupons is probably too early to say."

Ashmore's Dehn thinks the Fernandez administration might take inspiration from the performance of the first two years of former President Nestor Kirchner's government in the early 2000s. Then, Argentina's economy grew 8.8% in real GDP growth per year and Kirchner stuck with the government's then IMF programme, he said.

Alberto Fernandez was chief of staff for Nestor Kirchner, the predecessor and late husband of Cristina Fernandez.

Argentina is now waiting for a key $5 billion tranche of its latest IMF programme.

Dehn is also buoyed by Fernandez's choice of Guillermo Nielsen as economic adviser, even though some creditors are wary after his role as the country's chief debt negotiator following a default in 2002.

"The fact that Nielsen is part of the economic team and talking for Fernandez suggests to me that Fernandez will pursue a more market-friendly line than currently expected," he said. (Reporting by Tom Arnold; Editing by Alex Richardson and Alistair Bell)