At the start of a New Year, the French firm, along with many others, sets out its thoughts over what to expect – or at least prepare for – in 2023. Unsurprisingly, inflation and rates feature prominently in the thinking.
The new economic landscape that’s taking shape against a backdrop of inflation stands to create investment opportunities in manufacturing, Japanese stocks, and emerging-market debt, France-based asset manager Carmignac has said.
Inflation and interest rates will remain elevated; populations will get older; there will be a shift from globalisation towards reshoring production, and countries will try to speed up energy transition, Frédéric Leroux, a member of Carmignac’s strategic investment committee, said.
Among the opportunities in play, Leroux said corporate bonds provide an example because investors appear so bearish about this asset class that yields are factoring in default rates that Carmignac thinks are not justified by underlying business conditions.
In other areas, Leroux said the dollar will probably weaken during the next cyclical upswing as a consequence of the new equilibrium in the economy. As a result, he said, this would make emerging-market debt more attractive than it is now.
“Once freed from the grip of a strong dollar, central banks in these regions will be better able to implement more dovish policies and pursue a trajectory of monetary easing,” he said.
Leroux said the prospect of recurring waves of inflation has prompted the firm to have another look at investment themes which have been set aside in recent years.
“For instance, considering just how much the energy transition is exacerbating inflationary pressure, we understand that the transition can’t take place effectively without the involvement of today’s oil and gas majors. These companies will have a significant role to play and are some of the biggest investors in renewables,” he said. “Pragmatic investors could therefore choose to work judiciously with those “transitioners” that are firmly committed to promoting clean energy.”
Taking a “contrarian bent,” Leroux said Japanese stocks are worth taking a fresh look at.
“These stocks have fallen short of their potential to deliver strong returns and foreign investors have been shying away from them for years, yet Japanese companies are now under-priced according to all standard valuation methods,” he said.
“Ironically, the factor that could trigger a rally in these stocks is an interest-rate hike by the Bank of Japan in response to sticky inflation. Higher interest rates would help spark a sustained appreciation in the yen, which would be a draw for foreign investors who have been put off by the country’s feeble currency for the past 12 years. In this regard, investments in Japanese banks and in sectors that stand to benefit from a rebound in the domestic economy could be attractive ways to regain exposure to the country,” he said.
Leroux believes that there are long-term opportunities in manufacturing as a result of government attempts to encourage “green” energy and re-shore activity following the pandemic.
“Europe in particular should offer many promising investments in the manufacturing theme,” he added.