Carmignac’s Didier Saint-Georges encourages and ‘all-weather’ approach
Recent changes to central bank sourced liquidity have created new prospects for markets, says Didier Saint-Georges, a member of the investment committee at Carmignac Gestion.
A parallel reduction in liquidity from the Federal Reserve and the People’s Bank of China has created a radically new prospect for the markets in recent weeks.
How should we interpret this sudden change, which could certainly not have been predicted on the basis of the US economic data – even less so of the Chinese ones?
The US economy may be doing a little better but it remains fragile. China is slowing. So we will have to look elsewhere for an explanation: it probably lies more in the conscious decision to start the normalization of the bond market before the economic recovery makes the task any harder. The Fed would rather prepare investors now for a gradual reduction in its quantitative easing than take the risk of a subsequent economic recovery forcing a hasty withdrawal.
In the same vein, the Chinese central bank seems to have decided to correct the country’s excessive credit growth before it becomes more difficult to correct imbalances in an orderly fashion. The success of these normalisation plans will ultimately lead to healthier markets based more on their fundamentals and no longer just on the artificial support of central banks. However, we need to be lucid about the execution and heightened volatility risks that this climate change presents.
There will be a fine line between interest rates picking up prematurely, threatening the US recovery and nipping Europe’s gentle stabilisation in the bud, and normalisation coming too late, causing interest rates to surge. These two pitfalls do not leave much room for bond markets to improve. On the other hand, they maintain the possibility of more resilient equity markets if monetary policy is applied perfectly.
As with the United States, it will be hard to bring order back to the Chinese financial system unless investors bear some of the initial cost. Chinese leaders, as Zhu Rongji was in the 1990s, seem determined to accept weaker short-term GDP growth as the price to be paid for having to restrict credit growth. The emerging world still holds numerous medium-term investment opportunities, but one needs to be clear about three things: 1) bond positions, which will continue to benefit from the global economic slowdown and drop in inflation, need to be concentrated on short-dated, high quality issues; 2) currencies of countries with a significant current account deficit are fragile and must be avoided; 3) equity portfolios must remain focused on blue chip companies generating strong cash flows.
Weather forecasters are well aware that climate change is not a linear phenomenon, and an increase in volatility will doubtless be the first symptom. Equity markets will also experience this instability, which will create opportunities to buy the best long-term growth prospects on attractive terms. On this point, European and US companies have not missed a beat, which with every passing day confirms to us that it is still the emerging world in which they are investing for the future. The current dynamics of Japan, whose economic policy is currently shielding it from the risk of global liquidity drying up, and the strength of the dollar, a corollary of the economic scenario playing out in the United States, are other promising investment themes. Even in Europe, it is now possible to find attractively valued, high performing companies with little sensitivity to the Eurozone’s weaknesses.
This all-weather approach currently offers, in our opinion, the best risk-adjusted performance prospects.