Emerging Markets

Carmignac Smiles On China, Select Emerging Markets

Tom Burroughes Group Editor London 14 May 2021


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.

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