Carmignac says all lights are green for an investment in emerging markets. The weakening dollar and the rapid recovery of economies mean increasing your allocation to EM equities and bonds is a must.
‘In Asia, the pandemic is being handled much better [than in the rest of the world], which explains why these countries have a better track record compared to Western countries. For example, manufacturing activity has been on the rise for several months,” notes Xavier Hovasse, head of emerging markets at Carmigac. ‘And the growth differential will continue to be felt throughout 2021, despite a significantly lower fiscal stimulus compared to developed countries.’
Budget surplus
At the same time, the fiscal stimulus in the West has played into the hands of Asian exporters, who have gained market share. Take, for instance, the Chinese budget surplus, which reached a record in December. And despite this wide divergence in economic performance, emerging market equities have hardly outperformed their developed market counterparts.
Another supportive factor is the expected recovery of corporate profits (in dollar terms) of the emerging countries. ‘This is a fundamental indicator of emerging market performance and should improve very quickly,’ says Xavier Hovasse. ‘Asia is now investing much more than the other regions, and is producing better and better products. On an economic level, China is expected to catch up much faster than the United States.’
Hovasse sees a lot of potential in Samsung, which still is attractively valued despite its strong strategic positioning within the technology sector. ‘Companies with high valuations are susceptible to interest rate rises, so we have reduced our exposure to this segment in 2020.’
Regarding the risk factors in the Chinese market, Xavier Hovasse stresses that the private sector debt ratio remains high, which may tempt the central bank to keep its policy rate too high. ‘The other risk is a sharp deterioration in relations with the United States, and in particular an open technology war, which could put pressure on the entire value chain of certain Chinese stocks. In general, we are positive on Chinese domestic companies, which are relatively unaffected by this risk, or Korean and Taiwanese companies, which should benefit from these tensions.’
‘EM currencies to appreciate by up to 40%’
Hovasse’s colleague Joseph Mouawad, responsible for Carmignac’s emerging market bond portfolio, believes markets will continue to be supported by a recovery in emerging market currencies. ‘These will rise by 30 to 40% against the dollar. Today, we are on the eve of this movement, which is mainly the result of strong money creation in the United States.’
In this context, he emphasises that the majority of government bonds in emerging countries still have real positive yields, unlike those of developed countries. He therefore expects investors to become even more interested in this asset class in the coming quarters. ‘We think the Chinese central bank will remain cautious and keep its policy rate at an attractive level for investors.’