Carmignac: cycle is back, inflation revives

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Man remains the most unbeatable machine. The punchline ended a Carmignac’s advertisement for its flagship Carmignac Patrimoine fund that was broadcast during the firm’s first quarterly meeting of the year to a large audience of European journalists and investors in Paris on 23 January 2017.

Joking about the ad on stage, Didier Saint-Georges, managing director of the company, kicked off the meeting : “Apparently someone said “Let’s make active management great again !” after watching the video.”

Trumponomics remain at the core of Carmignac’s strategy and expectations in 2017. Cyclicality is back in the markets, claims the asset manager, especially in the US where it anticipates stronger growth coupled to rising inflation.

Frédéric Leroux, head of Cross Asset Team at Carmignac, highlighted that the industrial recovery in the US was not only tangible in the energy sector but also in other areas such as consumer goods.

He sees in Trump’s project of lowering corporate taxes in order to bring back capitals in the country another factor of believing in the US industry’s rebound.

A 20% drop in taxation brings a 25% rise in US companies’ earnings, Leroux calculated. Lower corporate tax rates as well as deregulation would support M&A activity in the US, he also said.

“If Donald Trump implements protectionist measures, the US are likely to enjoy a stronger economic growth on the short term whereas some issues can pop up on the long term with economic partners. Trump’s policy could be very inflationary.”

Carmignac’s head of Cross Asset Team added inflation in the US could become more resilient than it was in the past and that a real wage inflation should be expected this year.

He suggested a slowdown could occur if Donald Trump does not deliver what the markets expect or if US interest rates rise too fast.

Leroux explained that the big rotation in equity markets will pursue and that coupled to accommodating monetary policies, it will eventually help to justify high stock valuations.

US airlines and the cement industry alongside financials (in particular Japanese) and energy sectors will be among the winners of Carmignac’s reflation scenario.

About Europe, Leroux said economy was improving in the region and that investors should not be afraid of the forthcoming elections. However he has warned traditional political parties that they will have to act for the middle-class to avoid far-right candidates’ win.

Leroux therefore expects more fiscal stimulus implemented wherever elections will be held this year.

Also he believes the ECB might not be able to keep its accommodating policy on the long term because of the inflation revival.

Carmignac expects the global growth to remain weak but tend to synchronisation as central banks behave differently.

Defensive stance on fixed income

Rose Ouahba, head of Fixed Income at Carmignac, has drawn attention to the defensive positioning of the firm on the asset class.

The fixed income team keeps a negative stance on US rates which will continue to rise she said and therefore has hedged portfolios against interests’ rise.

Ouahba stressed that the adjustment of long-term yields has started in the US where “the inflation premium has been rebuilt into the rate curve” while inflation premium remains underestimated in European interest rates. Carmignac’s fixed income chief awaits a catch up of European rates with US rates.

Ouahba highlighted the possibility of a taper tantrum episode in Europe that would strengthen the euro.

On the European credit side, she underlined that credit leverage is reaching a peak while bond yields have crashed to record lows. For the first time, the Eurostoxx yield exceeds that of the European high yield market, she said.

Ouahba sees opportunities on the European subordinated bank debt segment (CoCos), she named still an undervalued asset class. Bank Core Tier 1 CoCos have only been rising for the last six years, she pointed out.

Regarding currencies, Carmignac has massively lowered its exposure to currency risk. The dollar is set to face a very sharp appreciation against the yen and the euro while the yen will remain weak due to the action of the Bank of Japan, Ouahba exposed.

EM: Commodities producers and exporters winners

Carmignac’s head of EM equities Xavier Hovasse and Charles Zerah, portfolio manager of Carmignac Portfolio Global Bond, have dismissed investors’ main concern around emerging markets.

Fed rate hikes are not necessarily negative for emerging markets’ stocks, they said, when looking at historical data.

Commodities’ producers and exporters benefit the most from the current economic environment in the EM space.

Brazil and Russia which have both faced a sharp rebound remain among the countries favoured by Carmignac.

Zerah identified Russia as “the main beneficiary of higher oil prices” with an improvement in the country’s political risk related to the election of Donald Trump.

The jewel in the EM universe could be India that Hovasse ranked as favourite country in Asia despite the withdrawal of 500 rupee and 1000 rupee notes at the end of last year, that created chaos in the country.

Hovasse and Zerah said demonetisation will have a negative impact on the short term but will be positive on the mid-long term.

Bank deposits have risen in India. Indian banks are now well positioned to finance and support Indian economy, they argued.

The duo remains cautious towards Mexico after Trump’s election, especially on manufacturers exposed to the US market.

In addition, political risk has increased dramatically, even more after Carmignac’s meeting since Donald Trump signed a decree to immediately launch the building of a wall on the US border with Mexico, that could be financed by a 20% tax on imports from Mexico.