Stock Picker Who Made 420% in Argentina Sees More Gains Ahead

(Bloomberg) -- Argentina’s top stock picker over the past three years profited handsomely from the push to ease regulations in the energy industry, and he sees more gains ahead.

Christian Cavanagh, the chief investment officer at Delta Asset Management in Buenos Aires, guided his energy-focused Recursos Naturales fund to a 420 percent return since early 2015, outperforming all other Argentine equity funds with holdings above $10 million. The period was marked by government efforts to gradually lift caps on energy, electricity and fuel prices, benefiting producers.

Cavanagh is staying bullish on utilities and oil and gas companies, betting more price increases will boost profits, and also taking a favorable view of the broader stock market. He says the economic initiatives pushed by President Mauricio Macri -- including his fight against inflation and efforts to increase trade -- will continue to fuel growth and lure investment as Argentina leaves behind the policies of Cristina Fernandez de Kirchner’s administration.

“Argentina is the story of a new normal, and the good news is that’s leading to an asset repricing in a country with huge potential,” he said in an interview. “Equities are still rising and remain at reasonable levels compared to the region.”

The Merval has jumped 312 percent in the past three years, and 167 percent since Macri came to office in December 2015. Energy stocks were among those that led the way as the new president reduced subsidies with a goal of consumers paying market rates for electricity by 2019. Oil companies in Argentina’s Vaca Muerta, the second-biggest shale deposit in the world, will benefit from prices above $40 a barrel, Cavanagh said.

The energy fund’s top holdings have been in gas transportation companies, electricity producers, YPF SA and Pampa Energia SA, which operates in both the power and oil and gas industries. The fund recently sold part of its stake in energy generator Central Puerto SA as the stock reached record highs, and Cavanagh is now weighing whether to build his holdings back in a follow-on sale expected to price on Feb. 1.

“We like the company,” he said. “It has a good management and high potential.”

Of course there are still plenty of risks to investing in Argentina. The peso falls to records on a regular basis, and forecasts are for it to continue to weaken, sapping returns in dollar terms. Some critics also say that Macri has been slow to implement needed economic reforms amid tepid growth and double-digit inflation -- and the sound of anti-government street protests could be heard from inside Cavanagh’s office. The money manager says Argentina is still vulnerable to external shocks given needs to finance a large fiscal deficit.

Delta Asset Management has beefed up its operations recently, growing from 30 employees last year to 44 now, and raising its assets under management 70 percent last year to $1.2 billion. Delta was owned by Raymond James Financial until December 2016, when the Florida-based firm left Argentina as part of its exit from Latin America. Minority investors and partners rebought their stake and now operate Delta as an independent company.

Beyond utilities, Cavanagh is betting on banking stocks as mortgage credit recovers and inflation slows, with Grupo Supervielle SA and Grupo Financiero Galicia SA as his top picks. Cavanagh, who started as a Brazilian equities analyst at BBVA Banco Banco Frances SA’s asset manager and rose to be its CIO before joining Delta in 2008, predicts Argentina will gain an emerging-market designation soon (an upgrade from its current frontier status) after MSCI Inc. delayed a decision last year.

“The government has been doing its homework to increase the country’s chances,” he said.

--With assistance from Shin Pei

To contact the reporter on this story: Carolina Millan in Buenos Aires at cmillanronch@bloomberg.net.

To contact the editors responsible for this story: Arie Shapira at ashapira3@bloomberg.net, Daniel Cancel at dcancel@bloomberg.net, Brendan Walsh, Andres R. Martinez

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