Each week, a professional investor tells MoneyWeek where he’d put his money now. This week: Simon Pickard, head of emerging market equities, and manager of Carmignac Gestion’s Carmignac Emerging Patrimoine fund.
How can investors take advantage of the long-term outperformance of emerging markets while protecting their savings from the gut-wrenching short-term fluctuations that are a feature of these markets? That’s the key question I shall try to answer.
Emerging-market economies are only halfway through the releveraging rebound that began in the wake of the carnage that followed the rolling crises of the 1990s: (the ‘tequila’ crisis in Mexico, the Asian crisis and Russia’s rouble crisis). Emerging-markets’ growth profile and balance-sheet solidity continue to argue for investment there rather than developed markets. And the valuation of both emerging-market equities and bonds makes this an attractive time to invest.
The patient investor who held emerging-market assets over the last 15 years has been handsomely rewarded. But investors have, rightly, become tired of asset managers telling them that buying emerging markets is a way of escaping crises in developed markets.
There have been three bear markets that originated in developed-world bubbles bursting in the last 11 years – the tech bubble in 2001, the subprime bubble in 2008, and the euro bubble in 2011. During these unstable periods, investors actually lost more money by switching into emerging markets, as global investors fled from volatility. Only the most courageous could ride out these difficult periods to take advantage of the inevitable emerging-market outperformance in more stable times.
So what investors should aim to do is allocate their capital across three different emerging-market asset classes – equities, fixed income and currencies. They also need the ability to hedge equity and fixed-income risk when needed. Such an approach can massively reduce volatility in times of economic stress. The overall goal is to enable investors to retain their capital and be in a position to profit from the resumption of the long-term, emerging-market bull story.
Flexibility and creativity have always been the hallmarks of what we do, and we think the themes in our funds reflect those values. Thus we own a great deal of the local debt of smaller emerging-market countries, where in general the balance sheets are of far higher quality than in some of the larger countries. We have, for example, large positions in Colombia, Peru and the Philippines.
On the equity side, we favour cash-generative, consumer-related stocks. A classic example is the discount and convenience retail sector, which tends to have high barriers to entry and is a great way to penetrate into the smaller towns and villages of emerging markets.
Shoprite (Germany: HY7) in South Africa, for example, is rapidly increasing its presence in the rest of South Africa. Meanwhile, CP All (Germany: LVN) holds the 7-11 franchise for Thailand. Or there’s FEMSA (NYSE: FMX), whose Oxxo convenience stores are now ubiquitous in Mexico.
Lastly, we seek to buy emerging-market gold-mining stocks. Their valuations relative to the gold price have never been so attractive and they are going to benefit from recent falls in oil, a big input cost. So, one of our biggest positions is Eldorado Gold (TO: ELD), whose mines are principally in Turkey and China.