Xavier Hovasse, fund manager and head of emerging markets equities at Paris-based asset manager Carmignac, discusses the outlook for emerging markets and investment opportunities in the region.

Xavier Hovasse, fund manager and head of emerging equities at Carmignac, is optimistic about the outlook for emerging markets in 2023 after China did a U-turn from its zero-Covid policy and reopened the economy. 

“The re-opening should stimulate growth across the emerging world, especially in Asia and Latin America,” he told WealthBriefing in Paris in an exclusive interview. 

“In China, we are still seeing encouraging data on transport and movement after the New Year holidays, which could provide strong support for labour in the manufacturing and service industries, helping to drive the consumer spending recovery,” he said. 

“We still think that the revival of domestic consumer spending is a key theme for China in 2023, in spite of short-term volatility,” Hovasse continued. Even after the recent rally, valuations are very attractive which is why the firm is keeping significant exposure to China.

“Inflation is also lower and prospects for emerging markets are better than for the western world, led by China,” he said. 

Hovasse stressed how important it is to him to factor in ESG criteria in the investment process, with the emerging markets fund classified under Article 9 of the EU’s Sustainable Finance Disclosure Regulation and the patromoine fund covered by Article 8. He excluded investments in oil and gas, tobacco and airlines.

He highlighted how Asian – especially Chinese – tech and internet stocks bounced back at the start of 2023, with New Year celebrations influencing Chinese markets. Travel expenditure was higher than a year earlier too, albeit without returning to the levels of 2019. Nevertheless, cyclical sectors such as materials, energy and industrials underperformed.

Meanwhile, after decent performance in 2022, Brazil started the year badly amid concerns about Lula’s ability to manage the economy and his plan for substantial expenditure. Indian markets also lost ground at the beginning of the year, the firm said.

Hovasse is portfolio manager of Carmignac’s emerging markets and emerging patrimoine funds, which have both performed well recently. 

Carmignac emerging markets fund
The strategy seeks to achieve capital growth over a period of at least five years, benefiting from the growth potential of emerging markets. It performed well in January and beat its reference indicator, benefiting from the performance of its Asian – particularly Chinese and South Korean – stocks. The Chinese stocks include Alibaba and Beike and South Korean Samsung, which bounced back to become top contributors, the firm said in a statement. Taiwan Semiconductor also rallied after announcing good results and a price hike, demonstrating its ability to overcome inflation. The firm’s Latin American investments raised performance as MercadoLibre and Mexico bank Grupo Banorte recovered well. Nevertheless, the Indian markets’ fall weighed on performance but the firm’s underweighting in the country helped the fund’s performance.

The asset manager also made some changes to its Brazilian portfolio, selling its interest in stock exchange B3 Bolsa and increasing its exposure to utilities, for which the future looks bright given the country’s high infrastructure requirements. It also opened a position in Equatorial Energia – a diversified infrastructure holding company with business in several public services including electricity distribution and water treatment. 

Carmignac emerging patrimoine fund 
It is a flexible multi-asset emerging market fund combining three performance drivers: emerging equities, bonds and currencies, adopting a sustainable approach and favouring countries and companies that deliver solutions to environmental and social challenges. 

The fund delivered a positive return in January, ahead of its reference indicator, given the good performance of its equity and bond investments. The fund’s Asian – especially Chinese and South Korean – equities rallied strongly, with top holdings in China (MINISO, Alibaba, Beike) and South Korea Samsung gaining ground to become the biggest contributors. Its Latin American investments such as Argentinian MercadoLibre and Mexican bank Grupo Banorte also raised performance, the firm said. In fixed income, the fund benefited from its positions in Hungarian local debt and Mexican and Romanian external debt, but also from its active management of emerging market currencies in Latin America and Eastern Europe. At a credit level, the fund derived a little benefit from its exposure to corporate issuers in the energy, communication services and financial sectors, the firm continued.

The asset manager believes that the economies of countries that have raised rates the most and are showing signs of exhaustion, mainly Poland, Czech Republic and Hungary, will be the most likely to shift towards a more dovish monetary policy tone. Although it took some profits after the rally, it is continuing to prioritise Hungary, Brazil and Mexico. It is also continuing to favour manufacturing countries. For the equity component, it is keeping its high exposure to Asian countries, especially China and South Korea, given their attractive valuations. However, it made some adjustments, taking profits on stocks that had done well, such as MINISO. Conversely, the firm opened a position in DiDi, which is China’s vehicle-for-hire platform with a 70 per cent domestic market share. It also increased its exposure to the dollar and euro while scaling back its selection of Eastern European and Latin American currencies to reduce the portfolio’s risk.