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Carmignac Smiles On China, Select Emerging Markets

Tom Burroughes

14 May 2021

The manager of an emerging markets equity portfolio at 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 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.”