Buenos Aires — Robert Citrone, founder of hedge fund Discovery Capital Management, told Bloomberg Línea that “the next decade will be the decade of Latin America”, and that “Argentina will lead that process”, with President Javier Milei as a protagonist.
Citrone, a member of the “Tiger Cubs”, the group of hedge funds established by Tiger Management alumni, says his experience working under Julian Robertson and George Soros has provided him the tools to detect “gigantic opportunities that the market does not fully understand”, and which arise only once a decade.
In that sense, he considered that Milei’s reform program in Argentina represents the first case he has identified in his career in which “the average person in the street is supportive”.
Milei “is very important for Latin America as an example”, “but more than that, he’s important for the world and for the US, so we need to do what we can to help Argentina,” Citrone noted. Discovery holds positions in shares of companies such as Vista Energy and Grupo Financiero Galicia, among others.
As of last August, the fund managed assets totaling US$2 billion.
The following interview was edited for clarity and length.
How much of Discovery’s total assets under management are currently allocated in Latin America, and what percentage is in Argentina?
Rob Citrone: We invest both on the long and the short side, right? So we own assets and then we short assets. In Latin America, most of our assets are on the long side, and we do have some shorts. Most of our shorts are in Brazil, it’s not a large portion. So Latin America, I think globally, is our largest long exposure in the world. Argentina is the largest exposure in Latin America for us, it probably represents about 60% of our Latin American exposure as a whole. And we own dollar and local currency debt, through the blue chip swap rate. And we own equities. We’ve been long Argentina for a little over two years, in a meaningful size.
What’s the rationale behind the Brazil shorts? Do you see things with Lula sort of spiraling out of control?
Yes, we’re not comfortable with what Lula’s policies are. We think the finance minister and certainly the central bank governor have been fantastic. They’re trying to do the right things, central bank governor for sure. And Lula, I think, has the wrong ideas. I think he’s got a very socialist bent to him and he’s got some very, very really populist desires. And I think the other part of it is that we’re very bearish on China. And Brazil has a number of commodities and other exports to China that are very important. We think that those exports will be very weak. But really, it comes down to what we think is risk and policy in Brazil. There are tremendous companies in Brazil, it’s an incredible country. We think under new leadership in two years, Brazil could be an amazing long. I’ve done a number of conferences in the last few months. One of the things I’ve said is that this is going to be the decade of Latin America. We think Argentina will lead that. We think Milei is a big part of that. We think Brazil will have a huge role in that as well. And we think new leadership will come in Brazil that will be more centrist. And we’re quite constructive on Mexico. We think that the FDI that’s flowing into Mexico as a result of companies leaving China and the nearshoring that’s happening. It’s just in its maybe third inning of very early stages. So that’s a big tailwind. We’re constructive on the new president of Mexico. And we hope to meet her in the next few weeks. We’re quite positive. And we think Peru also is a great story in Latin America. There again, they’ll need better leadership. And we think they’ll get that in the next election, which isn’t that far away. And even Venezuela, we think we’ll have regime changes at some point in the next few years. We don’t know when. Certainly under this regime, it’s a disaster. But there’s hope, I think, that there’ll be change. The population wants change, obviously. They voted for massive change, and they just didn’t recognize the real election.
Going back to Argentine assets, is it correct to say that you have a preference on the equity side over fixed income? And if so, why is that the case?
I would not say that’s the case. I would say that today we probably prefer the fixed income side. We think that local currency instruments, through the exchange rate, are very exciting. We think the blue chip swap will continue to appreciate some more from this ARS$1200 level. We expect it to go down to around 1100. The yields are in the 45s or higher range. And we like the external debt, especially in the front end. We think that you can get 18% dollar yields for three-year paper. You can’t find it anywhere else in the world. And we think the probability of default in Argentina is minuscule. So in the 29s and 30s, you get paid out, because they amortize every six months, pretty substantially. You essentially get paid out your entire position by the time Milei’s first term is over. And we expect him to have a high probability of being reelected for a second term.
So you agree then with Minister Caputo that the country risk index is a lagging indicator?
Yes, we do. Unfortunately, Argentina is paying for the last 80 to 100 years of very poor policies, ineptitude and corruption. And it’s taking a while for investors to become comfortable again. All those defaults are costly, and Argentina trades at a much wider spread than it should, because of that history. But as time goes along and people see that Milei and his team are absolutely convicted in what they’re doing, the population is supporting them. And this is very interesting, because this is a reform program. And I’ve been doing this for 35 years. The number of reform programs I’ve seen, it’s in the hundreds. This is the first one I’ve ever seen that the average person in the street is supportive. And they’re supportive because Milei told them what he was going to do. And it was going to be tough. He wasn’t giving any false hope or promises. He basically said that we’re going to clean up this corruption, and I think the population sees that. They understand it. It’s a very well-educated population in Argentina. It’s a tremendous amount of human capital. When I met with President Milei and Mike Milken in May at the Milken conference, we discussed how in the 1920s Argentina was one of the wealthiest countries in the world. And through really bad leadership and bad policies, the country had very little growth. Roughly 50% of the population is below the poverty level. This is just not acceptable. And Mike said, you know, “there are people in history who can change history, and I think you’re one of them. The number one thing you have to focus on is human capital. And human capital is 10 or 15 times the size of the financial capital”. And Milei said, well, Mr. Milken, you know, when I came in, we reduced a number of the ministries in the government, we cut expenditures by 30%. But I added one ministry. I added a Ministry of Human Capital. It was an amazing meeting. There’s some meetings in life you’ll never forget. And this is one that I’ll never forget. The level of conviction that Milei had, and his beliefs, and what he was going to do… And he didn’t care about the politics of it. He said, “this is the right thing to do. People, we have to recognize the value of the individual in Argentina. And we’ve got to give them the power back. And that’s what we’re doing. We’re taking it away from the government and we’re giving it to people.” I met with Mike very recently, and we had a fireside chat. And he said, “Argentina, you know, we all need to support Milei, because if you believe in freedom, in free markets, in democracy and personal liberties, you know, Milei is the one out there in the world speaking about that.” He’s very important for Latin America as an example. But more than that, he’s important for the world and for the US. So we need to do what we can to help Argentina.
Is it reasonable to say that based on everything you just said, that you’ll be boosting your Argentina positions?
Yes, I mean, as our assets are growing, as we get inflows, we’re going to be putting a lot of that into Argentina. I’ve been telling investors really for the last year, right around the election when Milei won. But particularly when he put the team in place, and he started to move forward with what he was actually going to do, and he did it. I basically said, look, I’ve been doing this for a long time, and worked very closely with Julian Robertson and George Soros, two of the best. I’ve learned from two of the best. And every 10 years or so, these monster opportunities come across that the market doesn’t really understand. And Argentina is that one, I think, for the next decade. Ten years ago, it was the dollar-yen, which was just a gift. It turned out to be an incredible investment to buy dollars against the yen. And we’ve seen a substantial weakening of the yen over that period as they went to a reflationist policy. So I think this is the next one. I was in Argentina in 2001, right after convertibility. The situation was much worse than it is in even what Malay inherited. They had just defaulted on the dollar bonds, which were trading at 20 cents on the dollar. The Bonex 89 were 20 cents. The central bank had almost no gross reserves. And the convertibility program with Cavallo and Menem, what they did in the reforms, had made Argentina the best performing market in the world in every asset class for the next four years. It’s kind of been the same way now for the last kind of 18 months. Argentina is the best performing market in the world in all those asset classes. And I think it’s going to continue for the next few years as well. Not without risk, but it looks very promising. We’re here to assess risk and return. And you still get paid a lot to invest in Argentina. I said I liked fixed income and local currency a little bit better. The equities rallied a lot, but they’re still incredibly cheap, because the earnings multiples are low. In the energy sector, it’s just revolutionary what’s happening in Argentina. I think that’s going to be one of the leaders of the reduction of the sovereign risk, as those exports pick up. Those equities are attractive as well. They’ve gone up a lot, and the multiples are not as attractive as they were. But they’re still, when you look around the world, quite attractive.
What are the metrics, the variables that you’re monitoring closely to see if that run is going to continue? What do you want to see?
It really comes down to leadership and policy and execution. So far, I think we’ve seen pretty good execution, pretty good policy. The IMF is going to be very important. I think there’ll be a very favorable agreement for the IMF with Argentina. It’s helping that they’re going to reduce the surcharges. You know, rates are coming down, which can help Argentina as well. So the payments to the IMF are going to be reduced probably by US$800 million a year. That’s a lot of money, a lot of savings for the country. And I do think the IMF will recognize that Argentina is really its star pupil, and it’s doing really great things. And they need to be more supportive. I think they will be. Continued support by the local population. That’s the number one thing. If Milei’s popularity stays in the 40% range or higher, I think he’ll do incredibly well in the midterm elections, and that will cement the next two years of getting the policies in place. So it really looks pretty favorable. It’s a good environment for Argentina globally. We think inflation is going to come down a lot more. We see demand for local currency picking up. We see success with the tax amnesty program. The fiscal policy has been incredible. They’ve hit all the numbers. They continue to perform and outperform, actually. I think that will continue. And they’ll continue to be very prudent on the monetary front. The monetary overhang’s pretty much gone. They’ve been taking away capital controls slowly, but it’s been happening. Every month there’s more controls released. So by the time they actually lift the final controls, there won’t be much to worry about. And they probably need about US$10 billion to do that. And we think that that’s certainly doable over the next six months.
Can you give me a little color on conversations that you’ve been having with fellow investors. What do they say when you give them the the bullish case for Argentina? Is there a general acceptance of that case, or is there still a lot of doubts?
Well, when I talked about it in January and February this year, massive doubts. When I talk about it now, there’s a lot less doubts. And a lot of people are investing now. It’s interesting. People are more excited to invest today. The yields are a lot lower. The returns aren’t quite as high as they were back in January and February. But to be fair, I think the reform program that was passed midyear and then implementing the legislation so fast, that was a game changer. And that, I can see why people now are much more excited about it. I’ve come to Argentina 60 times over the years. So I’m very familiar with the country. I have a lot of friends and I’ve seen ups and downs, good and bad times there. Argentina has been off the map for a while. So now people are just coming back to it. The optimism will just grow from here. People are much more receptive now when I talk about Argentina than six months ago.
A business leader told Bloomberg Línea this week that we have it in our DNA to be pessimistic, because we’ve run against a brick wall so many times.
I see that locally. Most of the economists I meet there are very pessimistic, but I don’t think they have the right diagnosis. They’re all focusing on reserve accumulation and they don’t take into account there’s some seasonality to it. You’re going to see reserves start to pick up next year, substantially. It’s about credibility and there needs to be an anchor in Argentina, both on the fiscal and the monetary side. And we see that in place. So we see the domestic population gradually getting more constructive. I think you’ll see the local economists ultimately begin to change their tune. It’s happening a little bit, slowly. The bimonetary system is very complex. Argentines think in dollars, right? Devaluations don’t work. They don’t work in Argentina. So to talk about devaluation, it’s just silliness. You’ve got to talk about productivity enhancement. You got to talk about reforms. That’s what’s happening. The human capital in Argentina is outstanding. And the wages in Argentina for that human capital are incredibly low. So Argentina is an unbelievably competitive country at this exchange rate. You see companies like JPMorgan with over 5,000 people in Argentina. Accenture, over 12,000 people. And they’re hiring people left and right, to serve not just Argentina, but to serve the region. And why? Because they can hire the best people at the best costs, with the best opportunities. They’re not doing it because Buenos Aires is such a wonderful place to come to, because it is. They’re doing it because they can hire really quality people who do great work. And that wouldn’t be the case if the exchange rate was substantially overvalued. You go to Argentina and there’s so many great, wonderful restaurants and things to do. And the prices in dollars are really inexpensive compared to the US or other places.
Two pieces of news this week. Caputo mentioned that they’re in no rush to lift capital controls and that countries like Chile and South Korea were able to grow for extended periods of time, at solid rates, with such controls. And then Milei said that the accumulation of reserves is a non-issue because he doesn’t need any dollars in the central bank to eventually lift controls, because there won’t be any pesos to spark a run on the government. Do you agree with those statements?
I do agree that they’re not going to lift the controls, all the controls, until they’re completely ready. They’ve been lifting controls. I mean, it’s much freer now than it was. And they’re not going to lift them without having everything in place to do it. They’ll get what they need in the next six months to do that. They’ll be able to raise the money abroad. And I think the US government can help with that a little bit, but the private sector is where they’re going to get the money. And I think the government and IMF will help a little bit, but the key will be the private sector. As demand for pesos picks up, there is going to come a time when there’s going to be pressure on the peso to appreciate. And I think that’s why the blue chip swap is starting to appreciate over the last couple of months. But global investors do want to know when those currency controls will be lifted, in order to have some visibility of when they might be able to cash out, right? Not only foreign investors, but domestic investors, maybe even more. I mean, it’s probably one of the biggest questions I get, but I think a lot of domestic, even foreign investors are coming in, especially FDI investors. They’re coming in believing that the...
Sooner rather than later…
Yes. And they believe that the government is serious and the reforms are real. Some of the investment programs were put in place as a result of the law changes recently are very favorable. And so you’re seeing these projects that have been lined up for a while that have been dormant, especially in the mining sector and some in the energy sector, really taking off. People are not waiting around for the capital controls. They’re finding ways to get the investment of the country, even with them in place. It’s a little bit of a hindrance, but not as much as we would have thought. It’s actually doing better. And FDI is going to be a really important driver for dollars and dollar accumulation in Argentina over the next couple of years. By the middle of next year, reserves in Argentina will be much higher than they are today.
Which means that rising debt repayments and maturities as of next year are a non-issue?
Correct. That’s correct.
Regarding the lawsuits Argentina has been losing. This week, we had a case in London over GDP-linked bonds, US$1.5 billion. And also in New York, the US$16 billion case that Burford Capital won over the YPF expropriation. Does all of this inform your investment decisions?
Well, I think there are things to pay attention to, but the Burford decision is one that I scratched my head on when I look at the legal analysis that was done, completely rejecting Argentine law. It doesn’t make sense with a lot of other decisions that have been made on cases like that. So I think that’s a very flimsy case. I don’t think they’re going to get anywhere near US$16 billion. It makes no sense. That one I don’t think will be an issue. The GDP warrant one, you know, Argentina had to make a deposit of, I think, US$439 million roughly to try to appeal the case. Since they just lost the case, that US$439 will be released, I’m guessing, to the warrant holders. And I think Argentina will negotiate a deal over the next six months to a year with the warrant holders on the rest of the amounts that are due. So I think we’ll come to some resolution with those holders. And they’ll meet somewhere in the middle.
What’s your base scenario for the upcoming US elections? And how important is a Donald Trump victory to help Argentina at the IMF?
I would say that we’re 70% on Trump winning and that percentage has been going up. He continues to gain in the polls in the battleground states. In fact, he may be winning in all the battleground states at the moment. But in some of those states like Pennsylvania, Wisconsin and Michigan, it’s very tight still. I don’t think we’ll go into the election much higher than a 70 or 75% probability of victory for Trump. I think Argentina is in a very unique situation, because if Kamala Harris wins, it’s not negative for Argentina. The US is still going to be highly supportive of Argentina. It just hasn’t been a focus as much as it needs to be. There’s a lot of other things going on in the world. But certainly in the region, Argentina is going to be a standout and the US will support Argentina. But Trump and Milei, I think it’ll be a personal relationship. And I think there’ll be tremendous support. It’s just not support with the IMF. It’s way beyond that. I think there’ll be support in all areas. And the two countries will work together on many, many different issues. And there’s even direct support through some of the development banks in the US, and other things that can be given to Argentina. FDI, we might even negotiate a free trade agreement. A whole bunch of different things I think could happen. And they’ll be working together on all geopolitical international issues together, seeing pretty much eye to eye on a lot of them. So that’s important to the US as well. So I think you’ll see real tangible support from the US. I think Argentina is the number one beneficiary in terms of Trump victory, but not negative if Kamala wins. I think China is the biggest loser if Trump wins.
