Meeting with Carmignac

This week I met with members of the respected investment house Carmignac.

They divided the conversation into three geographic regions: the USA, Europe and Emerging Markets.

Felt the US had little real GDP growth prospects for a number of years
The consumer will continue to de leverage
The US government is reaching a debt ceiling and hence likely to offer less support to GDP growth in the future
Corporations continue to prefer investing abroad than in developed markets in general
Even when country was downgraded their cost of borrowed trended downwards. Their equity took a hit as GDP growth likely to suffer if government will invest less in its economy as can borrow less due to approaching its ceiling
However, still has advantage of the reserve ccy hence many people around the world hold USD and would lend to the government, hence their low rates
Is market suggesting government should take a more aggressive role in supporting its economy by offering the country lower rates

In Europe there was an agreement that only three viable solutions exist: money printing (a temporary solution), fiscal unity or debt restructuring
They are very underweight European equities in general, especially their banks, and are not keen on holding the Euro
Felt Europe was in a similar situation to Japan in the 1990s. There consumer de leveraged but the export machine started working
Now many developed countries need to export so more tension with currencies and trade (not an isolated case anymore)
Euro was more stable than USD because of advantageous interest rate differential
Inflation fears reducing, likely to take Euro down
Europe very dependent on banks for financing (like Japan), whilst USA less so (opposite 75/25 split in bank to capital market funding)

This means whilst banks are unable to lend as they have to re capitalize themselves from poor investing in the past and new regulation, Europe is unlikely to find much new capital in this arena for growth. We may see European companies looking for more capital in the capital markets if they decide to open up, or they will be static

Problem of Japan was it took so long to admit the problem of its banks and start to re capitalize them

Euribor is increasing more than Libor in the US as European banks are not trusting each other as much so cost of borrowing is increasing


Very positive on EM as they become more consumption based and less export based economies. They feel inflation will decrease. Since EM equities now are at a 30% discount to DM equities when compare MS indices, they could be the sweet spot for EM equities: growth, low inflation and cheap initial position. I don’t think I agree as strongly as they do. They are using a relative cheap indictor, when it should be absolute! I don’t think inflation will be easy to control with wages increasing 20% per annum. There will be a benfit from commodity prices decreasing if we see less capital injections from DM central banks and recession in DM, but internal inflation is still a problem resulting from the growth they have which is very high. Interest rates seem to be stabilizing in the EM world – but lets see how the economy reacts.

There portfolio core is on companies helping to make EM consumers have a better quality of life. This is primarily consumer companies, infrastructure and financials

The satellite portion is in more growth opportunities such as technology and raw materials

They like gold miners as feel they are out of synch of the gold price. I note that gold miners sell gold at a certain pre determined price or unhedged. Hence their earnings over the next 10 years will depend on the gold price over that time period rather than just at this moment when there is a lot of fear and when gold attracts the most attention as an investment!

They feel at this moment have to guess what will be the safe havens, i.e. where capital will flow

Worried about EM currencies as they may see lots of capital outflows if DM recession occurs, hence may be an opportunity to buy them soon

EM consumers hard for them to buy foreign basic consumer goods as more expensive (remember their currency is quite weak and costs are higher abroad). For the growing rich they may be attracted to the high quality DM consumer goods, hence the strong business environment for BMW and Louis Vuitton in sales and profits.

EM consumers are therefore buying more local brands and consumer goods, and here there is the potential for many opportunities

Note that many international corporations have lower margins in EM countries, hence their P/S ratio will be lower if all sales where based in these countries