Buenos Aires — Harris Kupperman, chief investment officer (CIO) at Praetorian Capital, made a 180-degree turn on October 22. Almost overnight, the founder of the asset manager went from recommending investment in Argentina to selling his entire position in the country.
Headquartered in Rincon, Puerto Rico, and established in 2019, Praetorian Capital is a boutique investment manager focused on high conviction investment opportunities, according to the firm’s website.
The result of the general elections, which left Economy Minister and the ruling coalition’s candidate Sergio Massa almost seven points ahead of Javier Milei, was the trigger for this abrupt change in his expectations regarding the future of the country.
In a recent letter to investors, Kupperman explained the reasons for his change of heart, stating that, although he still did not consider that the outcome of the election had been decided, he believed that the changes that Argentina needs could hardly be brought about by Sergio Massa or Javier Milei, who, if he wins in the November 19 runoff, will do so by a slim margin.
In an interview with Bloomberg Línea, Kupperman explained his decision, and pointed out why he believes that “the country will be stuck for another four years” in the event of a Massa victory. He also considers that “the country needs to dollarize, because everyone has lost faith in the peso”.
The following interview has been edited for length and clairity.
Bloomberg Línea: After the October elections you decided to close your position in Argentina completely. What was the reason for this? What is your main concern about the country’s immediate future?
Harris Kupperman: Argentina is going through an economic crisis. And it is going to get worse unless the government stops printing money and gets out of the way. Argentina should be a very rich country. It has a lot of oil. It has a lot of agricultural resources. It has good infrastructure. I’ve been to Argentina. I like it very much. But you can’t do business when there are three different currencies, exchange controls, and you can’t export or import fertilizer for your farm or do anything commercial.
However, months ago, Praetorian Capital had invested in companies in the country and recommended Argentina because of the prospect that it had “bottomed out”.
The country needs to dollarize, because everybody has lost faith in the peso and the country needs a new government. I thought Javier Milei had a very good chance to win, I think he could still win, but if he wins and it is 52% against 48% and he does not control the Congress and the Senate, I do not think he can change much. The Peronists will block all changes. They care more about getting reelected than about the country. And if they block change and create poverty to get re-elected, it is not a good investment. We saw how it worked last time with [former president Mauricio] Macri. And as soon as it became obvious that Milei was not doing as well as I expected, and neither was Bullrich, it was time to sell. I am a very disciplined investor, and when the thesis changes, you get out. You don’t argue with the price, you just get out.
In your letter to investors, you talked about the possibility of unlocking the country’s potential. Where do you see that potential?
I think the whole country, all sectors, have a lot of potential. What is happening with Vaca Muerta is really dynamic, but nobody is going to make long-term investments in oil. If Sergio Massa puts a cap on the price of oil, nobody is going to want to invest. And you can’t bring in exploration equipment or build pipelines or do anything if the rules change every month. So I think it’s the most obvious solution, because it’s the fastest source of dollars, and the country has a dollar problem. They need dollars.
How do you solve the problem of the lack of dollars?
I think the country should sell its stake in YPF. But not sell it today at $10. They should increase production for a couple of years, and then they could probably sell the stake and pay off all the debt with the IMF. I mean, it seems really obvious that that asset is very valuable if they manage it as adults. And I think they should partner with international oil experts who have a lot of experience in this. And they should use modern drilling techniques and produce a lot of oil.
The main generator of foreign currency is agriculture. Do you also see potential in that sector?
I have some Argentine friends who are involved in agriculture and they tell me that they can’t afford to buy fertilizers or import them. And, you know, they have problems getting fuel for their tractors and they can’t get parts for their tractors. It’s hard to farm. Argentina has a lot of land and I think that’s the other truism: if you abolish the exchange controls and let people sell their wheat and corn at global prices then they can use the proceeds to buy fertilizer, I think there will be a lot of wealth as well. It seems like a very easy solution. The country has a currency problem and a government problem. I mean, it is solvable.
In your letter to investors you pointed out that Argentina needs to make structural changes. You mentioned exchange controls and inflation. Are there any other structural changes you think the country needs?
I think the country needs to have a balanced budget or something closer to it. They spend too much money, there are too many public employees, the government is too big in the economy, and there is too much regulation. All these regulations have created a mess, that’s the reason why nothing works.
Do you think that you could invest in Argentina again in the next few years if the economy recovers?
Yes, of course. I want to invest in Argentina. I think there are a lot of advantages if the country can solve these problems. I just need to see progress. I tend to be, I guess, more adventurous as an investor. By taking more risks I expect to get more returns. I was willing to bet that a change of government would be a change of trajectory for the country. But I don’t think Massa is going to change much. It seems to me that the country will be stuck for another four years, unfortunately.
Was this the first time you had invested in shares of Argentine companies?
No, I have invested several times. When Macri won, I made a lot of money and sold.
In spite of the problems, you had good results...
I am very disciplined. Last time I made money and this time I made some money. I made a lot, actually, and ended up with a very small profit. But if you buy cheap before there’s any expectation of recovery in prices, then when it goes bad you get your money back usually. And for me, getting my money back means, you know, making 10% or 20% or losing 10% or 20%. But if Milei had won, I think this stock would have gone up five or 10 times in dollar terms. Although not immediately, of course.
Why not?
Because when you dollarize an economy, there can be a lot of volatility. But I think, looking ahead a few years, it could be worth five or ten-fold. That’s what got me excited. And that’s why I thought the risk-reward ratio was very attractive.
You also talked about the opportunity cost that was lost because of the October election result.
Yes, that’s a shame. I was really looking forward to it. I was planning to go there for Christmas, visit these companies and buy more. I’ll probably go back someday, but I think it was a great opportunity for the country and obviously for investors. It’s really unfortunate what happened because I think there are a lot of people in Argentina who really want a change. And unfortunately, it’s not working.
“I think a lot of the markets are cheap in Latin America historically. Latin America always tends to trade at a discount to other markets. And it’s a bigger discount than normal, so I think there are a lot of opportunities. The usual problem is that there is not a large domestic investor class. So you need international investors and it’s hard to attract them.”
Harris Kupperman, chief investment officer (CIO) at Praetorian Capital
Do you see value in other Latin American markets?
I think a lot of the markets are cheap in Latin America historically. Latin America always tends to trade at a discount to other markets. And it’s a bigger discount than normal, so I think there are a lot of opportunities. The usual problem is that there is not a large domestic investor class. So you need international investors and it’s hard to attract them. There’s not a lot of liquidity. And I think that has always been the problem in Latin America: money in, money out, in a region where politics swings back and forth. That continues to scare investors, while other countries are moving to the center.
Do you see any solution to this problem of money coming in and money going out?
You need stability in countries, political stability. Look at Peru, for example, whose biggest industry is mining. It goes first in favor of mining, then against mining. They change their minds. I don’t know how you can invest when the rules change.