After several years of headwinds, Xavier Hovasse believes that the trend should become more favorable for emerging markets, and more particularly for Asian countries. China, South Korea and Brazil are the main allocations for the next few months.
Xavier Hovasse is the head of strategy for emerging countries at Carmignac. In this capacity, he oversees the destiny of three strategies, the most important of which is Carmignac Emergents, a product rated four stars by Morningstar which has assets under management of more than 1 billion euros. The fund posted one of the best performances in its category over a three-year period (see table), and the best among active conviction funds (exposed to around fifty positions).
Xavier Hovasse is the head of strategy for emerging countries at Carmignac. In this capacity, he oversees the destiny of three strategies, the most important of which is Carmignac Emergents, a product rated four stars by Morningstar which has assets under management of more than 1 billion euros. The fund posted one of the best performances in its category over a three-year period (see table), and the best among active conviction funds (exposed to around fifty positions). In addition, this three-year performance was achieved despite a difficult 2021 financial year, during which it was impacted by exposure to Chinese technology stocks. Since the beginning of 2022, the group has largely caught up with the competition, and has posted a decline limited to 8%. We had the opportunity to interview Xavier Hovasse during his recent visit to Brussels. TRENDS-TRENDS. How did you get through this difficult 2022 financial year to negotiate?XAVIER HOVASSE. The crisis in Ukraine has amplified movements in emerging markets. We have, on the one hand, the countries exporting raw materials which directly benefited from the consequences of this war, in the forefront of which we find Brazil. We then have commodity-importing countries (such as Taiwan or South Korea) which suffered a sharp deterioration in their trade balance. Finally, we have China, which represents the largest weight in the emerging indices and which has been pressured by the perception that it is an ally of Russia and that the invasion of Ukraine could one day foreshadow an invasion. from Taiwan. The policy on the coronavirus has not helped… Indeed, this policy affects a country which represents 20% of the gross domestic product at the global level. This country has been a growth engine for the world for many years, and the slowdown caused by the Chinese authorities is a problem for many cyclical companies. As a result, Asian equities have been particularly weak since the start of the year, which has weighed on the performance of emerging funds due to their generally high exposure to the Asian region, and Chinese tech giants in particular. However, you have achieved a relatively good performance since the start of 2022. How have you mitigated the risks? We have underperformed since the beginning of the year, and we are nevertheless among the best funds in our category despite a poor positioning on Russia at the start of the year. Our positioning on China was the source of a good part of the resistance, because we had already cut in 2021 everything that could be fragile in this country. We were relatively contrarian (contrary to the general trend, editor’s note) in 2022, raising our positions in financially sound stocks that had been discounted too heavily, such as New Oriental Education or VIP Shop. Aren’t you afraid of the threats that may weigh on the listing of certain groups in the United States? The market misunderstood China and the risk that the loss of dual listing could represent for these companies. This is above all a problem for American retail investors who could no longer have access to securities that have dual listings, but for other investors it is not really a problem. Companies like Alibaba, Baidu or JD.com are listed in Hong Kong and do not need American investors to continue to grow. They generate very significant cash flows. In addition, Chinese retail investors constitute a mass 10 times greater than American individuals, with net savings reaching more than 4,000 billion dollars annually. Our good performance can also be explained by our greater exposure to Latin American markets (17% of outstandings), and more particularly to Brazil. What do you think of the political uncertainties that could result from a return of Lula to business in this country? From the end of 2021, we had the opportunity to go to Brazil with Edouard Carmignac. And during the meetings held with the country’s economic and political leaders, it became apparent very quickly that if Lula has a good chance of winning, he will not have the political weight in Congress to be able to lead the country alone. He has since teamed up with Geraldo Alckmin, the centrist mayor of Sao Paolo, who would take the place of vice-president. Lula also recently announced that he does not wish to repeat the mistakes of the past, in particular those during the presidency of Dilma Rousseff. What role is the dollar currently playing in emerging markets? Emerging markets have changed a lot over the past 20 years. The indices were previously dominated by commodity-producing countries (such as South Africa, Russia or Brazil). If the rise of the dollar then directly impacted the prices of many emerging currencies, this was not the case in 2022. Managing an emerging fund has become much more complicated because the management of positions is no longer only linked to monetary policies but to a host of other factors (notably geopolitical) that can influence commodity prices, and that must be monitored on a daily basis. For example, if Gazprom cuts gas in Europe, our view on the Korean won will be impacted. How is the portfolio positioned for the next few months? We have maintained our positioning in Latin America, which should continue to benefit from the current context in energy prices, but also in agricultural commodities. Brazil is the first or the second world exporter for a lot of other foodstuffs such as coffee, meat, soya or sugar. The country has recorded a marked improvement in its balance of payments, with a rise in the currency causing less imported inflation. This will enable its central bank to be able to lower its key rate in 2023 while all the other regions will be tightening their monetary policy. Do you have another strong belief for the future? South Korea has been strongly affected by the context of recent months. The country reminds us of China in 2021. This market currently weighs 17% of our assets with three large positions including Samsung and LG Chem. These companies are currently posting valuations that are very low. For example, Samsung is exposed to long-term growth trends, with a global leadership position, no debt, very high operating margins and $120 billion in cash. At present, is the context therefore favorable for emerging countries? In emerging countries, it is now possible to invest in fantastic high-growth companies with little debt, which display valuations worthy of sectors destined to disappear within a few years. Seven of the top 10 positions in our fund show positive net cash and will therefore not be impacted by rate hikes.