Buenos Aires — In Episode 481 of La Estrategia del Día Argentina, Francisco Aldaya spoke with Augusto Darget, a top financial analyst in the country who co-founded Silver Cloud Advisors, a consulting firm established more than 20 years ago in Buenos Aires.
A bear on Argentina and its assets for the better part of the last two decades, Darget turned bullish on the country a year ago, when he realized that the three main contenders for the presidential elections -Sergio Massa, Javier Milei and Patricia Bullrich- were considerably more market friendly than the current Alberto Fernández administration.
Since Milei was elected by the Argentines on November 19, Darget is now predicting the end of the decline for the Argentine peso, a more expensive country in dollar-terms and the appreciation of stocks and bonds.
Moreover, he commented on the uncertainty surrounding the stabilization of the Central Bank’s liabilities, among other issues that Milei will face as soon as he swears this Sunday.
If Argentina does its homework, if another year goes by and we cease to be categorized as a ‘Stand Alone’ market at some point in the next two to three years, investing in Argentine stocks in this country will be very attractive.Augusto Darget
Bloomberg Línea: Why did gold hit a historic nominal high last weekend, while Bitcoin surged?
Augusto Darget: I get the feeling that there were several factors. Analysts always seek some kind of explanation, and generally, markets have a life of their own. But this weekend, there was an issue in the Red Sea, where apparently a couple of American ships were attacked by Yemen, supported by Iran, and that stirred up appetite for cryptocurrencies and gold in pre-market trading. It could also be that last week there was a sharp drop in the yield of American Treasury bills, and we all know that a drop in yield means a weakening dollar and appreciation of other currencies, as well as gold. This generally applies to commodities. When you need more dollars to buy commodities, commodities rise, and when you need fewer dollars, commodities fall. The strength of that currency, which currently holds global hegemony, explains or provides many answers to the behavior of commodities in general.
And this Monday, equities plunged. How do you see the Fed’s soft landing in the United States, and how significant is the risk of a recession?
Economists must all be embracing each other over what the United States has achieved, where the bitter medicine of raising rates from zero to five, has had the desired effect. In the last six to seven months, there has been consecutive decline in inflation without affecting GDP growth, without seeing a slip in real estate or wages. Clearly, what has improved in the United States is productivity, and the markets responded in that way. At the beginning of the year, 75% of analysts foresaw a catastrophe, and the year is closing with the Nasdaq rising above 30 points, an S&P 500 at 20. Honestly, it seems wonderful to me. If this is confirmed, it will be a great lesson for the economy.
There’s a belief that mega caps explain a large part of those increases.
That’s the microeconomics of it. That’s what Juan Carlos de Pablo [Argentine economist] taught us. In the same neighborhood, under the same presidency and the same mayor, there’s a crowded pizzeria and an empty one. That’s microeconomics. There are winners and losers in these kinds of countries, especially when there’s so much competition, when the companies showing the most growth are still technology firms. I wouldn’t look for a bigger explanation than that. In between, we can talk about the resurgence of artificial intelligence, but everything we say now has nothing to do with what we were saying 12 months ago. The rise in rates was very clear because all the central bank presidents had been announcing it. It was clear to think that if the discount rate for cash flows was going to be higher, the most affected companies would be the tech ones because they were the most leveraged, and precisely the opposite happened. So, it’s an invitation to forget about gurus, to know that we know little, and in the big picture, I’ll repeat it again, what the American economy has done is remarkable.
And if we assume in this baseline scenario of a soft landing, with the possibility of the Fed’s first rate cut in mid-2024, what does that scenario imply for emerging market assets?
It’s music to the ears of emerging markets because if it comes with a very mild recession in central countries and it means a rate cut, that implies a decline in the dollar, an increase in commodities in dollars, and it’s the best scenario that emerging markets can hope for. We’ll see if high-yield bonds adjust strongly, reducing country risks, and well, that would be the best scenario that hasn’t happened in a long time, especially for commodity producers like Brazil and Argentina.
It’s been revealed that Mark Zuckerberg sold Meta shares for the first time in two years. Do you see any relevance in these kinds of movements?
I find it wonderful when founders gradually divest their shares to give life to companies. I always recall the case of Bill Gates, who many years ago held less than 2% of the company. I also remember the case of Steve Jobs. When one wonders why companies like Disney or Boeing endure for 200 years, 300 years, it’s precisely because capitalism works there in the capital market. Companies open up their capital, and the owners of the companies are numerous people who, as minority shareholders, take ownership of the company. They demand a budget from their managers, and if the managers don’t perform, they seek other jobs. Family businesses, in general (particularly seen in Asian and Latin American companies), by not utilizing this system, often end up dying with their owners. It’s a shame and truly a huge contradiction of capitalism, isn’t it? Companies created that generate money, provide employment for many families, and yet die with their founding owners.
The Merval rose more than 50% in dollars this year, more than practically any other major index in the world. Has the time come for a correction that reflects that all the homework is still pending, and that it won’t be easy?
I would say that measured in multiples, Argentina remains - not as cheap as before - but perhaps the cheapest in the region. The increase didn’t just happen this year. Last year, the Argentine stock market rose by 30% in dollars. Maybe we were coming from the stratosphere, making that increase easier. It seems to me that if Argentina does its homework, if we pass another year and stop being Stand Alone at some point in the next two to three years, investing in stocks in this country remains very attractive. The good thing we have this time is that the winning candidate isn’t talking about a reversal in the next six months. They’re calming the anxiety. All citizens know that the path is very tough, that it will take a long time to correct relative prices, to be credible, to respect contracts, and gradually attract investments, showing that we are serious. So, it seems to me that within the risk of an investment portfolio, Argentina should have an important role in that portfolio.
Today, what is Argentina for you: a trade or a medium- to long-term investment?
I believe that today it’s a medium- to long-term investment, and I’m not generally an optimist. I was very negative about Argentina for 20 years, until last year. It seems to me that beyond who won, society has changed because both candidates proposed fiscal order, exchange rate unification, freedom to produce, export, and import. So it seems to me that society told you, ‘You know, what we’ve been playing for the last 20 years is over.’ We’ve never had so much public spending and never had so much poverty, so the emergence of a candidate voted for by the poorest and the wealthiest speaks to a societal change, something that hasn’t happened since they last voted for General Juan Domingo Perón. It seems to me that dinosaurs like me were missing something that the younger generation was loudly demanding.
How much can Javier Milei’s statements on December 10 and the details of his fiscal and monetary adjustment plan impact your personal portfolio?
Very good question because that’s what happened to me with the government of Mauricio Macri. In my personal portfolio, I’d say 20% is in Argentina, and I believe this president has a lot of conviction in what he says. You may agree with him or not, but he seems stoic. It’s like he warned the population about our situation, the tough times ahead, and where we’re aiming. I think we’re going to see a lot of volatility, a lot of uncertainty, but if the direction deepens, what needs to be done is grit your teeth, try not to look at the screens, and understand that the risk you have assigned in Argentina could have been assigned to another emerging market at some other time, but now, the valuations of bonds and stocks support having that risk allocated there.
Last time we spoke, you mentioned that oil and gas were your preferred sector in Argentina. If that’s still the case, what are the main risks for that sector in 2024?
Among all the companies, in this context where there will be so many upheavals in the adjustment of relative prices, I prefer those that aren’t heavily indebted, that have still made a lot of money even in this situation of controls and regulated tariffs. I still believe it’s the sector that will be the most benefited among all the sectors on the panel.
It’s challenging. I struggle with banks because I’m still unsure how the issue of Leliq (Central Bank’s short-term bills in Argentina) will unfold. If it unfolds favorably with rates lower than inflation, bank yields will be lower because profits will drop. I find it hard to see some sectors initially not receiving sufficient rates, maybe because the population can’t afford tariffs 700% higher than current ones. I’d say I’m basically comfortable with oil & gas, and the rest is a wait-and-see game. I prefer to buy them 30% higher with a defined trend than buy them at these levels and be surprised.
How do you think Milei’s ultimate goal of dollarization could affect the market’s expectations regarding Argentine assets?
“I believe Argentina is incredibly cheap in dollars. The blue dollar, MEP, parallel rates, which are practically the same, are too expensive for reality if it materializes. If Argentina tackles the fiscal deficit, the peso will gain value, and everything will be more expensive in dollars. In simple terms, what I mean is that if today you have lunch for $10 in Palermo, it’s highly likely that in a year or two, you’ll pay double in dollars. Even in the context of dollarization, you won’t be able to eat for $5 in Palermo. That doesn’t last long; it’s the famous overshooting. Perhaps it feels like it lasts a lot in our perception, but in a person’s life, it lasts practically nothing, and in a nation’s history, even less. So, I don’t give it much chance. Especially considering we still don’t know who the Minister of Finance will be, we don’t know the comprehensive plan, we haven’t seen any speeches, and you can see there’s quite a calmness with the exchange rate. The problems remain the same as a month ago. So, it’s a current reality; people buy expectations, not realities, and that’s what I think is happening with the markets in general.
If it becomes an issue again, then it will be something temporary.
Look at what’s happening with the bonds. Today, the AL30 is worth US$36, and it was worth US$25 a month ago. And Argentina has fewer dollars today than a month ago. So, what’s this? Well, this is expectation, it has nothing to do with reality.
And what opportunities are you seeing today, specifically in fixed income?
It seems to me that bonds trading at 35-30% of par value don’t have much charm if you’re going to have a state that fulfills what it promised: reducing the deficit, making Argentina pro-export, increasing reserves through good practices, inviting private sector investment because the public sector can’t do it, and precisely making the sacrifice to fulfill all contracts. Bonds at 35% of par value seem to lack allure, especially if we’re also considering a slight GDP downturn or adjustment caused by the recessionary measures at the beginning to stabilize variables. That’s music for bonds, not for equities.
How do you see Luis Caputo facing the challenge of normalizing the situation regarding the Central Bank’s liabilities?
It seems to me that he must be studying beyond not being able to disclose his weaknesses or strengths because it’s about creating the best possible expectations. I think he must be discussing with a lot of economists what to do because there’s no one truth here. I can give you two scenarios. If, after the president’s speech, optimism and euphoria take over, the Leliq (Central Bank’s short-term bills) unwind on their own because banks quickly start lending and don’t renew the Leliq, and it’s over. It’s just been a bad memory. If society, which ultimately decides the price of assets and drives the economy, isn’t optimistic, then the Leliq becomes a problem. So, I don’t take it well when they say it’s unimportant or very important, or the only important thing. Everything depends. So, one has to wear both hats. If the good comes, we focus on studying another topic. If it comes for the bad, we have to take action on the Leliq. Caputo is a person with a lot of experience, with many connections in the world, with many contacts. He must be focused on this issue to handle one or the other. I wouldn’t be drastic about this story.
Any other topic that we haven’t touched upon that you would like to mention?
It seems to me that analysts and journalists shouldn’t speculate on future scenarios because we don’t know what’s coming. I remember when I was a trader during the convertibility era. When it was announced, we all imagined it would abruptly end inflation and that at first, everything would be very recessionary. There was inflation, yet GDP grew because investment, a component of the GDP formula, increased. What traders envisioned back then didn’t happen. We don’t know the future, let’s support, be patient, and hope everything turns out well.
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