Carmignac will be beefing up exposure to Chinese equities in the near and mid-term as it seeks to adopt an ‘agile approach’ to equity exposure over the course of 2020.
In an investor note from Didier Saint-Georges, who sits on the French firm’s investment committee, Carmignac said 2019 marked countless market records for equities but remaining blindly overweight is not a winning approach for the year ahead.
The January update – entitled ‘Deciphering financial markets in 2020’ – indicated that careful stock-picking remains important, which has seen the company takes profits in large outperformers, such as luxury jeweller Tiffany and retailer Costco. This was to provide a more balanced portfolio, he said.
‘We have also beefed up our holdings in regions and sectors like healthcare and payment systems which we feel offer predictable earnings growth, and which are the focus of extensive research on our part. For instance, we invested in Stryker, a med-tech company that is riding high on opportunities to increase the penetration rate of surgical robotics in orthopaedics and other areas.
‘We also initiated positions in Safran, a high quality industrial name, and in Unicredit so as to selectively increase the cyclical component of our portfolio. Those stocks come on top of the more tactical index fund investments we made in European banks and the Chinese and South Korean markets a few months ago.’
Zeroing in on China, Saint-Georges said there has been a levelling off of Chinese growth but not at a rate to cause lasting problems. In addition, there are benefits from the fact that the government has reduced its rampant stimulus, as getting the economic situation under control is more of a priority.
‘Xi Jinping views stemming the surge in private-sector leverage and getting capital flows under control as strategic issues that take precedence over economic stimulus. The trade agreement with the United States will likely help the government achieve those goals and bring support to the renminbi. China is in fact where we currently see an expanding range of equity investment opportunities.’
Buying bonds: hunt for yield continues
With regards to fixed income, Carmignac is also adopting a pragmatic stance, as it believes a move between segments and regions at the right time will be more important than high-conviction investing in 2020.
‘The main components of our interest-rate sensitivity at the start of 2020 are government paper from the eurozone periphery, a narrow selection of corporate issues and EM bonds. In Europe, where intense financial repression still dominates the fixed-income space, we will continue to favour assets with good carry potential like Italian and Greek sovereigns.’
Carmignac will be mitigating directional risk in corporate credit through CDSs and by taking advantage of idiosyncratic opportunities, most notably in the high-yield segment.
‘We have also stepped up our exposure to EM bonds through a careful, diversified mix of local-currency debt - from Chile and Indonesia - and foreign-currency debt - from Romania and Turkey. Lastly, US Treasuries continue to offer asymmetric risk due to the lack of inflationary pressure and the obligation for the US Federal Reserve to stick to a dovish stance. We favour the short end of the yield curve: three-to-five months.’