Emma Wall: Hello, and welcome to the Morningstar series, "Why Should I Invest With You?" I'm Emma Wall and I'm joined today by Xavier Hovasse, Manager of the Carmignac Emergents Fund.
Hi, Xavier.
Xavier Hovasse: Hi, Emma.
Wall: So, you are, of course, an emerging markets investor with the entire universe at your disposable, although I thought today we could talk about Latin America. I know that it's a specialty of yours and it's a region that has been very much in the press and not in a good way recently. What's going on in the region?
Hovasse: Well, there are two important things happening today in Latin America; a big change in the economic momentum in the region, but also a big change in the political situation in Latin America. And as we know, politics is extremely important in Latin America. We've seen that countries like Argentina or Venezuela which had a great potential, a lot of wealth, a lot of oil and commodities and that was ruined by horrible politicians.
So, let me start with the politics because it's been the main driver in the last month. The nice surprise of 2015 was Argentina. 2015 was a very bad year for emerging markets generally speaking, but it's ended up with a very nice presidential election in Argentina where Mauricio Macri was elected. It was not forecasted by the polls, so it was a proper surprise. And he is very market-friendly. He wants to embrace orthodox economic policies, which is a big U-turn versus what Cristina Kirchner was doing before that. So, that has been a big event in Latin America.
And now, the other big leftist party in Latin America, the PT in Brazil, is very likely to be kicked out of the political landscape in Brazil. There is an impeachment process that has started last year, in December of last year, and it's gained traction recently, in the recent days, in the recent weeks and even in the recent days, when the biggest allied party to the PT in the government coalition, the PMDB, has decided to leave the coalition.
So, now the probability that Dilma is going to be impeached has gone probably to above 75% and therefore, there is a very good chance that at the end of April, the beginning of May, she will be impeached and she will be replaced by Michel Temer, her Vice President, who has got a much more market-friendly political and economic agenda. So, there is a positive wave in Latin America.
And even some of those countries like Colombia, Chile, Peru, are run by very, very good politicians. There is a presidential election in Peru in a few weeks and the woman who is the most likely to win the presidential election, Keiko Fujimori, is also very market-friendly. So, globally speaking, the political environment is really improving.
Wall: And one of the things that has caused great economic woes for the region is the fact that commodity prices have come down so much over the last year-and-a-half, but it may look like that is about to turn as well, which of course, will be a boost for the region?
Hovasse: Yeah, exactly. That's pretty right. Every single LatAm country is a commodity exporter, whether we like it or not, that's the case and the currencies are impacted by commodity prices. For most of the – except Mexico and Colombia, which are oil exporters, the other countries are exporting industrial commodities or agricultural commodities and in the case of Chile, Peru and Brazil, China is by a long way the biggest trading partner. So, the Chinese slowdown over the last few years has been damaging the economies and the currencies have been very weak.
Now, it's turning. The dollar is a bit weaker. Yellen is much more dovish. She mentioned specifically two days ago the Chinese risk and the renminbi as one of the key reasons why she would not be more aggressive in hiking rates. And China is launching also some stimulus package, like credit-driven infrastructure spending and we can see already cement prices and steel consumption going up in China. So, that's very supportive for the economies of Latin America.
Wall: And what about Mexico because I know that that's a holding or an exposure that you have within the fund that you're quite bullish on?
Hovasse: Yeah. We have a very large exposure to the Mexican market for a number of reasons. Mexico has one very good thing in for itself is that it's got literally nothing to do with China. So, there is a lot of stress around the Chinese balance of payment and the Chinese economy and the Chinese currency, as we know. Mexico is a satellite of the United States. Its industrial production has a very high correlation to the United States and there are plenty of underpenetrated sectors, the banking penetration is extremely low. So, the economic agents in Mexico have strong balance sheets, so we like the banks and we like the consumer stories in Mexico as well.
Wall: Xavier, thank you very much.
Hovasse: Thank you, Emma.
Wall: This is Emma Wall for Morningstar. Thank you for watching.
