Fairy tale environment to pause in 2018, says Carmignac cross asset head

clock • 4 min read

“If we don’t make any mistake on the implementation of the strategy, 2018 should mark the comeback of Carmignac.”

So said Frédéric Leroux, head of Cross Asset at Paris-headquartered asset manager Carmignac, during the firm’s annual media event on 23 January 2018.

Having recorded some €400m of net inflows all over 2017, last year has been challenging for Carmignac in the words of its managing director Didier Saint-Georges.

The firm’s flagship fund Carmignac Patrimoine reported returns slightly above zero, at +0.09%, in 2017 and outflows represented 7% of its assets. The currency effect, Saint-Georges termed “spectacular”, has gummed up the performance of the fund’s underlying sub-segments – in detail, Carmignac Patrimoine faced a negative currency effect of -6.3% while its equity and fixed income performances in local currency reached +5.6 % and +0.8% respectively.

“It was tough to be hedged everywhere last year. We should have better managed the currency risk. It is unlikely this situation will reproduce,” Saint-Georges said, adding that the absolute performance of certain Carmignac funds had been somewhat frustrating.

Though some Carmignac’s funds remain among the best performers on their respective segments, observed Saint-Georges, who highlighted for instance that the firm’s unconstrained global fund, having delivered returns of 0.10% last year, still beats 91% of its peers. He also pinpointed reasons for satisfaction in the in-house equity range, such as the performance of the Carmignac Euro-Entrepreneurs fund (+23.94%) among others.

What’s on the plate for 2018? Not Edouard Carmignac’s succession for sure, the founder of the asset management company having joked on the probability he could be Warren Buffett’s son and said that his successor would be selected in due course.

New fund launches or office openings will not be immediate as well. It is understood tests are being run on possible new strategies that will not be launched until the firm is convicted to do so. Also Carmignac has much business to develop already outside France, in particular in Latin America following the opening of its Miami office at the end of 2017.

As for markets’ broad macro picture, 2018 is likely to form a pause in the “fairy tale” environment markets have been living in for some time now and volatility will return, assessed Carmignac’s head of Cross Asset Leroux. “We will go back from the “finance” world to the real world,” he said.

It is crystal clear to Leroux that the US market current growth cycle will come to an end this year eight years after it started. Inflation in the US could rebound to around 1.9%, building from March to July, in Carmignac’s view whereas market expectations rather sit in a 2.5-2.6% range. Inflationary fears, albeit not necessarily justified, could spark volatility, said Leroux.

Other signals supportive of the firm’s stance on the US – on the global macro side – include the weakening of the dollar, that could be exacerbated by Trump’s tax reform, as well as that of the support for investments in many sectors, having started last year. Another Carmignac’s thought on the US remains that the impact of fiscal stimulus on growth is likely to be limited but will prevent a real cyclical reversal. As a result, the US slowdown should become visible as from the first quarter of 2018 for Leroux.

Speaking of China’s slowdown, Carmignac’s cross asset chief said investments in infrastructure by the Chinese government represents a considerable lever and that any infrastructure investment would offset China’s growth slowdown.

He depicted a favourable environment for the eurozone, as it has much to catch up with the US, but contained the overall optimism on the area, given that the eurozone remains still very dependent on global growth and that one third of its 2017 growth came from exports. On this last point, Leroux warned global trade may no longer be a growth driver anywhere in the world by highlighting declines in global trade growth in various countries such as South Korea, China and Germany.

Regarding central banks, a synchronised monetary policy normalisation is on the way according to the French asset management company. Leroux expects a major regime shift with interest rates possibly picking up even without inflation. He assessed central banks are “now following the cycle whereas they were preventing cycles from existing before”.

“You do not have to anticipate what central banks will do. You have to anticipate the cycle. Understand the cycle and you will understand what to invest in,” he said suggesting that deciphering central banks speeches and other geopolitical considerations would be “almost irrelevant” in this case.

He also argued that expected rate hikes will not be immediately counterproductive for the stock markets, and that whatever their number, they would not be enough to make investors reallocating assets massively from equities to fixed income.

A few market segments, mostly value, could suffer and unleveraged growth companies with high capital returns, in sectors such as tech and healthcare, would eventually stand out of the crowd in Carmignac’s macro-economic view for 2018.

“Being long quality growth names will prove to be an outperforming strategy,” said Leroux.