Emerging Markets
Carmignac Smiles On China, Select Emerging Markets
Investors have rotated from some hot areas of the stock market - such as those that shot the lights out during the pandemic - and rising market interest rates have grabbed attention. A portfolio manager for the Paris-based firm says the outlook for growth companies remains promising.
The manager of an emerging markets equity portfolio at Carmignac is sticking to “secular growth” companies in spite of some recent market shakeouts, and remains heavily invested in China’s new economy sectors.
So far, rising market interest rates haven’t hurt emerging market
indices unduly, and dips give a chance for long-term investors to
add positions, Xavier Hovasse, fund manager of the FP Carmignac
Emerging Markets Fund, told this publication. He is also head of
emerging market equities at the Paris-based firm. Carmignac has
€39 billion ($47.1 billion) of client assets under management in
total.
“We have moved to value, especially on Russia and Brazil, and we
have bought some cyclicals that are on low multiples. Last year,
we were buying all the winners of the tech revolution,” Hovasse
said. His fund is relatively small, with £27 million ($37.9
million) in AuM and founded in May 2019. It a UCITS-structured
entity and benchmarked against Morningstar’s Global Emerging
Markets Equity Index. He also oversees the Carmignac
Emerging Discovery Fund (£22 million), and co-manages the
Carmignac Emerging Patrimoine Fund (£29 million).
Rising market interest rates – and recent official consumer price inflation figures – have started to wake investors up to the idea that an era of ultra-low borrowing costs isn’t going to last indefinitely. The yield on the US 10-year Treasury bond has risen by more than 100 basis points over 12 months to 1.67 per cent. With the dollar being the world’s reserve currency and so many countries borrowing in dollars, that matters. Even so, contrasting with the 1997 to 1998 financial instability that hammered Asia and Russia, emerging market countries aren’t as reliant on short-term, dollar-denominated credit as was the case back then.
And working out which countries’ economies, and hence markets,
are more or less exposed to macro-economic shifts can be done
partly by examining how financially solvent their governments
are. On this point, Hovasse says emerging market countries can be
split into two broad groups: those with economic and budget
surpluses (much of Asia, the Middle East and Russia), and those
in deficit (South Africa, Turkey and Latin America.)
“The only major country that seems to be managing its economy
well is mainland China. The US is printing huge sums to deal with
its fiscal deficit,” Hovasse continued.
“If emerging markets were running a policy mix similar to that of
the US, we would describe it as a banana republic,” he said.
(Hovasse spoke to this news service before the latest fiscal
package of the Biden administration. In total, the US government
plans a $6 trillion spending increase, paid for – it says –
partly via tax increases on high net worth individuals.)
Some emerging market countries have difficulties, such as Brazil
(hit hard by COVID-19). That country is already three notches
below investment grade on its sovereign debt, Hovasse
said.
China is accumulating large foreign exchange assets, and had a
large surplus with the US last year – in spite of the trade
tariffs under Trump (and continued by Biden), he continued. It is
not all easy for China – it had a big deficit last year on
tourism.
China risks
There are risks – poor trade relations with the US, geopolitical
tensions over Hong Kong and Taiwan, and protests over its human
rights records. A conflict between mainland China and Taiwan
would be a “low probability/high consequences” event, he
said.
Russia has benefited from higher oil prices; it entered the
pandemic last year with an 11 per cent debt/GDP ratio, and had a
current account surplus.
“We had hopes for Brazil but the [virus] variant had devastating
consequences for Brazil,” Hovasse said. Brazil asset prices were
cheap after foreign exchange declines in 2021.
If interest rates rise it will benefit short-duration assets vs
long-duration ones, and will hurt technology and growth stocks vs
value stocks, he said.
China wobble
According to its March factsheet on the emerging markets fund –
the latest one available from the firm – it suffered a slight hit
in performance in March as investors rotated between sectors. A
move from growth stocks and beneficiaries of the COVID-19 crisis,
such as healthcare and internet, towards value and cyclical
stocks impacted the fund’s relative and absolute
performance.
But as the firm went on to say, sectors benefiting from digital
change and other innovations continue to be promising investment
in the medium term.
“Despite the recent consolidation, we maintain a portfolio of
secular growth companies, focusing on the main beneficiaries of
the ongoing technological and digital revolution,” the firm’s
factsheet said. “We think that this consolidation is healthy
given the stocks’ surge over the past year. Moreover, most of
these companies have reported very good results and show
encouraging growth prospects, making us confident over the long
term.”
“We made a few more adjustments to the fund. For example, we
closed our positions in certain Chinese stocks, especially in the
electric car segment, as their valuations were high. We took
advantage of this to reopen a position in flash-sale specialist
VIP Shop, and strengthen our position in streaming platform
JOYY,” it continued. “Overall, we remain heavily invested in the
Chinese new economy.”