We just sized up in Argentina

On Friday, we made trades on behalf of clients in our Offshore strategy. We initiated four (4) new Argentina positions: Grupo Supervielle (SUPV), Banco Macro (BMA), Pampa Energia (PAM), and YPF (YPF).

To fund these new positions, we exited HDFC Bank (HDB), Canadian National Railway (CNI), and Vinci (VCISY). 

Let’s dive in.

Argentina: what happened and why now?

Before we dive in, we figured it might be useful to start with the macro before discussing the micro. 

After a decade of unorthodox fiscal and monetary policy, Argentine assets were at some of their lowest levels in recent memory: many companies traded 70-80% off their all-time highs, rampant inflation, and government spending was out of control.

This changed, however, when Javier Milei, a reformist, was elected president in 2023. The new administration embarked on a multi-year plan to aggressively stabilize the country’s economy: Argentina would go through a period of painful adjustments that would allow the economy to not only normalize but thrive. 

Milei’s shock therapy reforms were initially very risky. Changing the status quo is not easy and citizens revolting against the changes posed real issues (see: Macri in 2018). 

So why now? Simply put: the reforms are working. 

Inflation rates are materially lower, the country posted its first fiscal surplus in decades, and the thesis for continued success has been meaningfully derisked. 

Looking forward, Argentina is expected to be the best performing country in Latin America, with GDP growth hovering close to 5-7% for 2025 and 2026. 

Despite Argentine equities moving higher in 2024 (example: Offshore holding Vista Energy finished the year +83%), we’re still constructive on its prospects for growth over the medium term. We don’t think the recent momentum has been fully priced in yet, and believe there is ample opportunity ahead as the country normalizes and returns to growth.

Sizing up in Argentina

So what does this mean for Offshore? We’ve sized up our exposure to Argentina by initiating four (4) new holdings across two major themes: (i) financials and (ii) energy.

Banco Macro (BMA) is one of the largest banks in Argentina with a dominant position within the low to middle-class segments of the market (think: smaller businesses and consumers outside large metro areas like Buenos Aires). Thanks to recent reforms, the banking sector is experiencing secular and cyclical tailwinds: BMA’s profitability should benefit from lower inflation rates, a stronger Argentine Peso, and loan growth as inflation recedes. Sector consolidation and associated synergies represent earnings upside that BMA is well positioned to capitalize on.

Pampa Energia (PAM) is the dominant integrated energy company in Argentina and the second largest independent power producer. Although the company’s stock has risen markedly in recent months, we believe there is still significant upside potential for a number of reasons: (i) Pampa is equipped with strong positioning and a defensive model with meaningful ownership in the Vaca Muerta Formation; (ii) Pampa trades at a large valuation discount to peers (4.5x EV/ EBITDA vs global peers trading at 6-8x); (iii) we believe Pampa should deliver healthy margin expansion on the back of increasing production, tariff normalization, and cost synergies; and (iv) we believe Argentina will ultimately be upgraded to MSCI Emerging Market status in the coming years which should drive substantial inflows into the stock.

Grupo Supervielle (SUPV) is the 11th largest Argentine bank and should benefit from many of the same trends as Banco Macro (BMA). On a valuation basis, we believe Grupo Supervielle should be trading closer to its peers given its significantly faster growth, declining costs, and increasing returns on equity (ROEs) as scale increases. As the Argentina economy normalizes and the banking sector benefits from a cyclical recovery in loan demand, we believe SUPV’s profitability should benefit greatly and in turn, its stock should benefit as well.

YPF (YPF) is one of the leading energy players in Argentina with prime exposure to the country’s crown jewel Vaca Muerta Formation - the largest shale oil and shale gas play under development outside the US. Milei’s administration has been friendly to energy producers with favorable regulatory initiatives and increased infrastructure investment. An attractive valuation, improving scale, and increasing efficiencies give us confidence in the risk / reward profile for one of Argentina’s most important energy producers.

Exiting rails, banks, and toll roads. 

To fund our new positions in Argentina, we elected to exit a handful of stocks across our Offshore strategy.

Canadian National Railway’s (CNI) execution has continued to underwhelm as labor strikes and worsening weather conditions have been an overhang on the stock. We elected to exit the company given our belief that Argentina broadly presents a more exciting risk/reward opportunity.

Similarly, we think the opportunity cost of continuing to hold HDFC Bank (HDB) is increasingly high in terms of pure returns potential. While HDFC Bank remains a quality banking franchise, its growth has underwhelmed expectations and we decided to exit and use the proceeds to reinvest across our Argentina positions with conviction.

The same is true for Vinci (VCISY). Although our thesis continues to track, the opportunity cost of holding Vinci has become quite high, and we elected to use the company as a source of funds to reinvest across higher conviction ideas in Argentina.

The results of these trades maintain Offshore’s net exposure of ~100%. As always, let us know if you have any questions about the recent trades; we’re happy to assist.

– Your Titan Team

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