By Philip Haddon | 13:32:27 | 18 May 2010
Carmignac Gestion’s fund managers are still positive on China, despite inflationary fears, and are hedging all exposure to the euro in expectation of continued falls, according to the firm’s latest strategy update.
Eric Le Coz, the firm’s portfolio management spokesperson and member of its investment committee, says the situations faced by some EU member states such as Portugal, Spain, Italy and even France are ‘unbearable,’ faced as they are by the ‘pressing necessity to pay down both their deficits and public debt in a context that has already turned deflationary due to the credit crunch and corporate deleveraging.’
‘The absence of common or even concerted policies makes it even more difficult,’ Le Coz said. ‘It prevents the implementation of a European economic mechanism that could lessen the negative effects that the upcoming fiscal retrenchment imposed by sovereign bond markets might create. Therefore, we believe that a continuing fall in the euro will be difficult to avoid.’
As a result, the firm is favouring the dollar and currencies from emerging markets such as Brazil, Turkey, Poland and Mexico. Only 20% of the firm’s flagship €18 billion Patrimoine fund, now the largest fund in Europe, is currently denominated in euros, while the €6.7 billion Investissement global equity fund has even less euro exposure.
‘Our distrust in the euro currency has led us to hedge all our positions in Europe by buying the dollar equivalent: as a result, the entire Carmignac Investissement portfolio is exposed either to the dollar or to emerging currencies,’ Le Coz said.
The firm’s main investment theme for its global portfolios remains the continued improvement in living standards in emerging markets. Within this, the firm remains positive on China’s prospects, despite market fears regarding inflation and further tightening.
Le Coz says ‘Chinese authorities are shrewdly dealing with the pressure’ of rising prices.
‘Even if they were reluctant to raise interest rates, China’s authorities increased capital requirements by 100 basis points, took specific measures to prevent property speculation and demanded to the private sector a 40% cut on their lending,’ he said.
‘Such measures will probably be strengthened in the near future, without ruling out the possibility of a rise in key interest rates. However, as Australia and India have shown, moderate increases in key rates, provided the market considers them relevant, do not hamper equity markets.’
He thinks China’s ‘ultimate weapon’ against inflation risk remains the revaluation of the yuan. ‘With external pressures easing slowly, especially from the US which wanted a Chinese decision in this respect, such decision should be made fairly soon. The revaluation of the yuan will represent an additional step towards global rebalancing, with China being obviously the leading player.’
Edouard Carmignac, company founder and co-manager of the firm’s two flagship funds, Patrimoine and Investissement, is AAA-rated by Citywire in seven countries for his risk adjusted performance.
In the last ten years the Carmignac Patrimoine fund has returned 117%. The average fund in the Lipper sector Mixed Asset EUR Flex – Global has lost 12% in this time.