Carmignac Portfolio Emergents : Letter from the Fund Managers

Carmignac Portfolio Emergents¹ was up 5.00% in the first quarter of 2023, against a 2.10% increase in its reference indicator³. This gain came against a backdrop of further underperformance by emerging-market equities, which are still being dragged down by US-China tensions and high interest rates.

Our portfolio benefitted from the rebound in tech stocks during the quarter. Two of our holdings did particularly well: Sea Ltd and MercadoLibre, leading online retailers in southeast Asia and Latin America, respectively. Our underweight position in India (7.0% of the Fund’s assets, vs 13.3% of the reference indicator) also lifted our return. We had scaled back our exposure to Indian stocks after their solid run in 2022, since their valuations had become stretched in our view, and instead invested in more attractive markets and sectors like South Korea and semiconductors. Another contributor to Q1 performance was our exposure to commodities-exporting countries. We had rotated our portfolio away from the Middle East and towards Latin America; Mexico (5.5% of the Fund’s assets) was the best-performing large emerging market in Q1, thanks primarily to nearshoring, or the trend by multinational companies to build production plants in Mexico so that goods can be exported more readily to the US. Middle Eastern stocks (0% of the Fund’s assets, vs 7.6% of the reference indicator) put in a disappointing quarter, which similarly reflected stretched valuations in the wake of the invasion of Ukraine.

The main event of the first three months of the year was China’s reopening after the government announced a U-turn on its zero-Covid policy in November 2022. That initially caused the disease to spread rapidly, which created chaos in the country’s hospitals in December but also allowed people living in large cities to quickly build up herd immunity. Then in January the government lifted almost all restrictions on people’s movement, kick-starting the country’s economy and especially its services sector. Our Fund management team was able to travel to China in early March; we visited Hong Kong, Beijing, and several smaller cities in order to get a better feel for the societal changes under way and the dynamics of the country’s economy as a whole. We came away from the trip slightly less optimistic about China’s GDP growth potential, given the disastrous state of its property market and the very low consumer confidence following Beijing’s poor handling of the pandemic. We nevertheless built up our holdings in Chinese equities, as we believe they’re in for a good year. Corporate earnings are expected grow at an annual rate of roughly 20% for the next two years⁴. China isn’t experiencing the same inflationary pressure as the developed world and its jobs market currently lies in employers’ favour. What’s more, China’s central bank is injecting liquidity into the system and lowering interest rates, at a time when stock prices have been driven down by years of underperformance.

We added a new Chinese company to our portfolio: Meituan, the country’s leading consumer services company with two main business lines: home delivery and retail services. Meituan has a dominant market share in both these businesses and forms a duopoly with Alibaba in the former and ByteDance – TikTok’s parent company – in the latter. Meituan was impacted by Beijing’s regulatory crackdown on tech companies in 2021–2022, but that crackdown is now over and Meituan stands to benefit from the reopening of China’s economy.

In Brazil, we sold our stake in B3 – an operator of stock, bond, and derivative exchanges in the country. Like most exchange operators, B3 has a de facto monopoly in its market, but Brazil’s central bank has said it wants to promote competition, suggesting the company’s earnings could come under pressure. We invested the proceeds from the sale of B3 in Equatorial, a new addition to our portfolio. Equatorial has power distribution agreements in several Brazilian states and has recently diversified into sanitation services, where the yields on concession agreements offer sizeable spreads over the yields on sovereign bonds. Our exposure to Brazil’s utilities sector now amounts to 7.0% of the Fund’s assets (as of 31 March 2023). The real yield on Brazilian sovereign bonds is over 6%, and these utilities companies offer spreads of more than 6 percentage points on average – and even 9 points for Eletrobras owing to the associated political risk⁵.

We now have a highly concentrated portfolio with 35 holdings, and the ten biggest holdings make up 51.3% of the Fund’s assets. This high concentration reflects our heightened focus on our strongest convictions in a market climate that’s more uncertain than ever. We believe the high quality of our portfolio companies’ balance sheets protects us against further rises in interest rates. For instance, seven of our ten biggest holdings have a net cash position, and the only bank on that list – Grupo Banorte (Mexico) – has a 22.9% capital adequacy ratio.⁶

Sources : Carmignac, Bloomberg, FactSet, BoAML, EM Advisors Group, company data, as of 31/03/2023

Reference to certain securities and financial instruments is for illustrative purposes to highlight stocks that are or have been included in the portfolios of funds in the Carmignac range. This is not intended to promote direct investment in those instruments, nor does it constitute investment advice. The Management Company is not subject to prohibition on trading in these instruments prior to issuing any communication. The portfolios of Carmignac funds may change without previous notice. The reference to a ranking or prize, is no guarantee of the future results of the UCIS or the manager.

Positioning as of 31/03/2023⁷