Buenos Aires — Episode 546 of La Estrategia del Día Argentina: An extended version of the #ExpressoFinanciero with Claudio Maulhardt, portfolio manager at the investment fund Galileo Argentina Sociedad Gerente de Fondos Comunes de Inversión. You can follow him on X as @brujodegalileo (or Galileo Wizard, in Spanish)
Galileo’s current base scenario is an end to currency controls in argentina by mid-2024, in line with what they expect to happen both from the government and the International Monetary Fund, according to Maulhardt. Exchange rate unification, together with the deregulation of state price controls, could allow Argentine energy companies to multiply their sales by up to three or four times, he says.
If you want to write in to suggest topics or send comments about the podcast, don’t hesitate to tag @franaldaya on X or write him at francisco@bloomberglinea.com.
MercadoLIbre seems expensive to me, but it has seemed expensive to me for a long time, and I’m clearly wrong. Thank God, I never went short on MercadoLibre.
Claudio Maulhardt, Galileo
The following interview was published originally in Spanish, and has been edited for length and clarity.
Bloomberg Línea: Tell us a bit about your background and, for those who don’t know you, what are you doing today at Galileo?
I entered the financial market in the early ‘90s and for around 12 years I was a research analyst focusing on equities, first at an Argentine bank and then at a Dutch bank, and I lived a few years in New York, working for that bank. At the end of 2002, I returned to Argentina, and set up a fund with the Galileo group, so that people from abroad could invest in our country’s stocks, when it was in the fifth basement after the great crisis [of 2001]. I’ve been at Galileo for nine years now, and I manage the Galileo Acciones [Stocks] fund, which is one of the largest equity funds here in Argentina.
Do you cover all types of stocks, or only some sectors?
We also have analysts, and I cover around 30 companies. Altogether, we cover around 30-35 companies. There’s a liquidity limit beyond which we don’t cover stocks. Local stocks and ADRs that trade more than US$150,000 per day, that’s what we look at. And then there are some companies that we look at because they issue corporate bonds, and although today they only have bonds issued, we believe that, in an Argentina that eventually works well, they will be natural candidates to have an IPO [Initial Public Offering].
Do you only follow Argentine companies, or also some from the region?
Practically 100% of my time is dedicated to Argentine companies. I didn’t always focus only on Argentina here at Galileo. At one point, I managed a Latin American fund called Galileo Event-Driven. I managed it for several years, so sometimes when there is a special situation or distress, I get involved because it’s fun for me and because, well, we’re not a group of a thousand people, but a small one, and we try to maximize each other’s capabilities.
Bonds vs. Equity
Argentine equity has lagged since Milei took office, having soared in 2023, bringing the majority of investor attention to Argentine fixed income. What opportunities do you see in equity today?
There is a question of whether you measure this in pesos or dollars. In dollars, equity has actually risen in February. When you look at the Merval, it fell 15% [in pesos], but in dollars, it went up. The overwhelming majority of Argentine equity transactions occur in the ADR market. So those who move [the market] are guys who measure themselves in dollars. The enthusiasm with Argentine equity continues, even though, in pesos, February hurt. What sectors are we looking at? Well, I think there are two ways to answer that question. For me, what is dominating the market is an enthusiasm effect with the change [in the political landscape] that triggering a lot of volume. And foreign inflows, when they come to Argentina, don’t have many places to go. There are very few stocks that are [sufficiently] liquid for a large foreign fund. There are four or five, and that’s why we’re seeing a very important rally in some banks, in YPF, in Vista, right? A few stocks, and not necessarily all of them are the most attractive from a fundamentals point of view. They are attractive if everything goes well, but under current conditions, they are not the most attractive.
From a technical point of view, what limits foreign funds from entering a less liquid stock?
A stock that has a volume of US$3 million per day, for a fund that manages, I don’t know, US$1 billion, is practically an unbuyable position, because it might need, to avoid moving the market price by entering and exiting, 10 days to buy it and 10 days to sell it. All that to generate a position that is, I don’t know, 1% of its portfolio. So that constitutes a limitation for these people. Which for us, smaller funds, is sometimes an advantage, because it allows you to play in [the stocks] you like the most. And other times it’s a disadvantage, because you might lose to the index, because what moves markets are the things that go with the volume.
Opportunities, sector by sector
Going back to the question of opportunities, do you see them by sectors?
We think that the Argentine market is still attractive, with low multiples calculated on earnings that are very repressed, due to a lot of restrictions. That said, perhaps the best opportunities are the ones that may sound more obvious to us. There is a particular sector, linked to the production, transportation, and distribution of gas and the generation, transmission, and distribution of energy, which lagged a lot for four years, losing very strongly against inflation, outside of contracts, and I think we are on the way to those contracts being settled. When they are settled, the sales of those companies will probably multiply by three or four. Earnings are a part of the balance sheet that is leveraged to that. That sector seems very attractive to us. Companies like Transener or TGS seem very attractive to us. The banking sector has had a very nice rally for holders. I believe it has a challenge in terms of their actual business, because banks are not being banks right now, they are not operating as banks. They are trying avoid receiving deposits, they have to pay a minimum rate for them, and they don’t have demand for credit. So they don’t have anywhere to place the money for that minimum rate to be profitable on the asset side. So what we are seeing is a shrinking of balance sheets. Well, if we believe that inflation is going to drop sharply, that rates are going to adjust and they are going to become, first, more free for borrowers and lenders, well, then banks could have the potential to generate more profits. Today, as things stand, it seems to me that they will earn less than what they earned in 2023, due to exceptional factors.
Political Risk, Lifting of Currency Controls
How much does political risk factor into your analysis of Argentine stocks?
Yes, it enters the equation quite a bit, in different ways. There are different stages, in an ideal world, of what could end up happening. A first stage of adjustment of relative prices gives us one type of opportunities. A second stage of structural reforms opens up another range. I think we are quite close to things happening in the first stage. In fact, all we need is for prices to be published, and other things have already happened, like the movement of the exchange rate [devaluation of the peso in December]. The second stage is much more challenging. The first attempt at the “omnibus bill” didn’t work. Milei’s presidential decree is currently valid, but we don’t know if it will be challenged in Congress or in the courts, eventually. This is very important in terms of the real potential that the Argentine stock market offers. Because what we see today in Argentina is that the same asset placed in another country in Latin America, some neighbor of ours, generates much more income, because it has a different tax treatment, it has regulation that is complied with, etc. So investments have a more or less calculable expected return. That’s what we expect to happen. Today, I would say that we are not investing based on that potential, although I believe that part of the market is already doing it.
If we think about currency controls being lifted in Argentina, how would it impact the profitability of these companies?
The lifting of currency controls, by itself, doesn’t seem very favorable for banks, because there is latent demand for dollars. There would be people who, if they could buy them freely, might go buy them. Now, if that is accompanied or implemented at a time when inflation has already dropped to levels that enabled lending the past, where there was demand for credit and investments, it’s another scenario. People might perceive that generating a positive real rate in Argentina or taking out a loan at a rate in pesos that is not in the triple digits... In Argentina, it can be a business opportunity. But presented on its own, I think it’s a challenge, at first. Anyway, the banks, you must have seen their balance sheets, have been preparing for this for four years. They don’t have a bank’s balance sheet; they have three and a half, four or five times assets over equity, and almost 100% of their deposits are covered with liquidity. So yes, it will be a bad business for a slightly longer time, but I don’t see them challenged from the point of view that they could stumble into a crisis.
The Future for Energy Companies
And the energy sector? How do you see the profitability of YPF, Pampa, and Vista, as soon as currency controls are lifted?
The companies already had a significant positive factor when the 40-60 [BCRA rule that required companies to refinance 60% of their foreign currency debt maturities] was removed because that helped the bonds of the companies trade at levels where they can issue new debt. And we saw that, right? YPF had to put up collateral, but it was able to issue at a reasonable rate to finance its very aggressive investment plan. The lifting of currency controls is positive news for energy companies, and mainly for the energy sector because there are not only the companies that trade, but there are plenty of international companies with businesses in Vaca Muerta. There are plenty of international companies with businesses in lithium as well, right? And many of them trade.
And if we think about the exchange rate issue in general, how do you see it impacting YPF, specifically? Could the lifting of currency controls generate higher profitability for YPF in the short-term?
YPF’s profitability depends on whether it can implement international prices, and its conversion to pesos, at the pump, right? I had reservations about how tolerable it would be for the price to increase if there was a strong devaluation, and I was very surprised. The price at the pump multiplied by three, or a little more, and things went smoothly. Demand will drop a little, but it was tolerated. Today, I have much more confidence that the operation, the operating result, the margin... YPF has the capacity to defend them. A problem it has on the balance sheet is that there is a very important part of dollar-denominated debt. It becomes much more onerous in pesos to pay off that debt if there is a higher exchange rate. So the fourth quarter is going to be very difficult to read. I don’t really know how it’s going to come out below the EBITDA line. I think it’s going to be a good quarter up to the operating line. There’s going to be an accounting adjustment to the value of some conventional assets that is quite large and that’s going to distort the reading as well. I think the bottom line is going to be quite bad, while the operating line is going to be quite good.
Do you have a base scenario on whether or not currency controls will be lifted this year?
We manage a base scenario where currency controls are lifted halfway through the year, more or less like the IMF’s scenario. We’re a little worried about how we get there, because clearly if inflation doesn’t drop much faster, we’re going to get there with the need for the exchange rate to move up more than would be convenient to launch the stabilization plan. It would give you a new round of price readjustment. The truth is that Argentine companies, management teams, have a mastery of survival and are prepared. The exchange rate went from $350 to $800, and all the companies are still alive. None went bankrupt, and it’s a jump that is not normal. We who make the market usually measure things by the Contado con Liquidación (CCL). But a company imports, exports, and pays debts at the official rate.
What about Argentine tech companies?
Why do you think MercadoLibre’s stock continues to fall, despite all the US banks upholding their price targets of more than US$2,000 end of year?
I don’t know. I think it has a spectacular business and a challenging price, but maybe it’s an age issue, that I was born and became used to different growth rates, and that I do a form of analysis that makes it harder for me to understand MercadoLIbre. Clearly, I’m not going against MercadoLibre in the market, nor am I against the business. I think it’s a spectacular company. It’s more challenging for me to think of a company that trades at 40, 35 times price to earnings [earnings per share], in a context where international interest rates are a competition for those multiples. Globant has similar multiples, and I also think it’s a spectacular company, but they are like two different animals. One is a product company, the other is a service company, and the service one is much more P times Q [price times quantity], right? And what we’re seeing year after year is that it has limited growth, which depends on how many customers it adds and how much it can charge. And in the last two or three years, it has depended a lot on how many companies it could buy to sustain that growth. I’m talking about the potential I see in the stock. I think it’s much more challenged. With MercadoLibre, I’m much less daring to say that. It seems expensive to me, but it has seemed expensive to me for a long time, and I’m clearly wrong. Thank God, I never went short on MercadoLibre.
Could a lower interest rate environment become tailwind for MercadoLibre?
If interest rates fall, it will definitely be a tailwind for the stock. I don’t see it as clearly for the operation. It will do well and grow at the rates it has been growing, perhaps 30% in sales and more in profits over the next two years. That’s what many investment banks covering it think, probably much better than we do. Yes, I definitely think it has that potential to do it. If interest rates fall, which is a market consensus that is starting to be questioned a bit, it’s definitely good news.
Balances of Argentine banks
What are your main conclusions when contrasting the fourth-quarter balance sheets of Galicia and Macro?
They were very different due to positioning and accounting issues. Macro (BMA) had a truly extraordinary result. It earned the equivalent of US$568 million, roughly 25% of what its market value was on the day of the report. It’s something that is not normal and had to do with the fact that in the bond portfolio, they had practically everything valued at market in duals and dollar-linked. The exchange rate moved, and they booked the corresponding profit. Almost all of that position was in what is called fair value or mark-to-market accounting. And they had very little, only what is the part of exposure to the Central Bank and CER bonds, they had valued at amortized cost, which is what we used to call an investment account, where they put it at cost and accrue the yield at which they bought it. The case of Banco Galicia (GGAL) was totally the opposite. They had a small part of their portfolio in dual or dollar-linked bonds, and they had a large part valued at amortized cost. So they generated a good quarterly result, but it wasn’t extraordinary. In fact, it was lower than the previous quarter in dollars. In pesos, it was higher. What this generated is that the book value, or the net worth, of Banco Macro rose much more than the book value of Galicia in a quarter, and I think those two stocks were a little bit arbitraged. If historically Galicia traded at a premium of around 10% in price or book value against Macro, now it’s almost 30-35% above. With time, that should adjust. Then when you go to the banks’ operations, it’s really complex. Every quarter you see the balance sheet shrinking, and that’s been going on for a long time. It was a defensive strategy. Remember that there was a time when there was fear that Leliqs or Treasury bonds would be exchanged for long-term paper, compulsorily. Having less of all those things [exposure to the public sector] was a way to avoid eventually having all their equity destroyed. Today it happens because with such high inflation, if you don’t generate a return on your assets that compensates for that inflation, you mark a huge loss in the line of inflation adjustment, which erodes your equity. After having reported, Galicia has assets over net worth of 5.1 times and Macro of 3.3 times. It has less leverage than many companies in the Argentine energy sector.
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