This article is part of Morningstar's "Perspectives" series, written by third-party contributors. Here, Sandra Crowl, a member of Carmignac Gestion’s investment committee sets out the asset manager's economic outlook and investment strategy for Q3 2013.
While Fed chairman Bernanke’s policy turnaround took markets by surprise, coming only two months after he confirmed the benefits of accommodative monetary policy for the global economy, we feel that there is a good case for some QE tapering starting in September. With less fiscal drag, the economy will be on a much sounder footing.
Continued abundant issuance of high yield covenant-lite corporate bonds is something the Fed would very much like to avoid. The bumpy road to rate normalisation may also be accelerated by the much publicised end to the Bernanke era in early 2014. In the meantime, volatility will rise as markets anticipate the Fed’s reading of the economy and long term rates will grind higher ending the spectacular 20 year bull run of the US bond market.
The start of the Fed’s monetary policy exit strategy marks the end to cheap credit for all. Emerging countries heavily dependent on external financing are already suffering in the short term from this change of direction. Despite intervention the Brazilian real and the Indian rupee are close to their recent weakest point against the USD. In China, the PBOCs signal in June, allowing the interbank funding rates to rise above 10% before liquidity was added, shows their intolerance to banks further lending.
In Europe, the slowdown in global trade and depreciation of the yen are weighing on Germany’s relative performance in terms of exports. In contrast, southern European countries’ efforts are starting to pay off at export and employment levels. This convergence of European growth rates will eventually make it easier to implement a more consensual economic policy in the Eurozone.
The shift in the US monetary policy stance in May prompted us to neutralise our global equities portfolio exposure to emerging currencies and we reduced our investments in those companies and emerging countries most vulnerable to reduced liquidity, and strengthened our positions in growth stocks with good visibility. The scale of the growth stocks theme (30.5% of the Carmignac Investissement portfolio) reflects our confidence in good companies able to prosper by exporting at a time of rather sluggish global growth. This new theme mostly includes European large caps such as Novartis, SABMiller and Nestlé, although there is also room for US companies Yum! Brands, Mead Johnson, Microsoft and Las Vegas Sands.
On the bond side the emerging market local debt asset class has suffered from the rise in US yields. Interest rates fell out of synch with their fundamentals, showing no discrimination. We took advantage of the market’s bounce back at the end of June to sell off this strategic allocation, which has made significant contributions to the Fund’s performance in recent years. On the developed country government bond side, our active and flexible management philosophy, in the face of higher US rates, has enabled us to adopt a negative modified duration profile using the long end of the US curve and maintaining our strategy based on a convergence of southern European yields.
Our predominantly European corporate bond allocation, which generates a yield of nearly 4% for an average maturity of 4.3 years, should continue to benefit from further narrowing of credit spreads as the European economy continues to improve. The improvement in the US trade balance and differentiation between monetary policies has led us to maintain our strong dollar exposure.
