Carmignac P. Emergents: Letter from the Portfolio Managers

Carmignac Portfolio Emergents posted a performance of +5.43% compared with +4.42% in the first quarter of 2024.

Since the start of the year, emerging markets have performed well, but the spread with their developed counterparts continues to widen. Despite support from the authorities, China's economy continues to suffer from the crisis in its property sector and ongoing tensions between the US and China. Nevertheless, we have seen an improvement in certain economic indicators, such as the manufacturing PMI index, and inflation has started to rise again, halting a five-month period of deflation. Against this backdrop, some economies are doing well and benefiting from China's fragility, such as India and South Korea, whose local markets have appreciated since the start of the year. In fact, India is showing healthy growth, with its economy expected to grow by 6.5% in 2024. However, Latin American markets suffered over the period.

Over the first quarter of 2024, the fund delivered a positive performance, outperforming its reference indictor MSCI EM index. The outperformance was essentially due to the choice of stocks and themes selected, despite a country allocation that should have been penalizing. The fund benefited from the increase of Tawain Semiconductor, which continued to capitalise on the artificial intelligence theme, becoming the biggest contributor to the fund's performance. The leading microchip foundry did not experience the same gains as other AI players during the uptrends, and is trading at attractive valuations. We also benefited from our position in South Korean carmaker Hyundai Motor, which saw its share price appreciate over the period due to the likely IPO of its Indian subsidiary in 2024. There were also good performances from the Mexican bank Banorte, and from New Oriental, the Chinese education company, whose earnings outlook has improved further. Despite the weakness of Latin American markets, our portfolio proved resilient. Finally, we were disappointed by our investment in Wuxi Biologics, whose share price fell because of proposed legislation in the United States aimed at banning Chinese biotechs from operating in the United States.

We remain constructive on emerging markets for the rest of 2024. The vast emerging universe offers us many opportunities across all geographies and sectors, at attractive valuations.

In China, despite the structural problems, the government's support measures are beginning to show results. We are maintaining a significant allocation to the Chinese markets to take advantage of market inefficiencies and the growth potential of consumer companies with strong balance sheets, but whose valuations do not fully reflect their underlying fundamentals and growth prospects. Almost all the Chinese companies in our Fund are leaders in their respective sectors, with strong cash flow generation, enabling them to maintain solid margins even in the current low-growth environment. Over the quarter, we took advantage of the rebound in the Chinese markets to reduce our exposure to China.

Elsewhere in Asia, we are maintaining our strong convictions in Asian technology stocks (Taiwan Semiconductor, Samsung Electronics), which are benefiting from the trend towards artificial intelligence.

During the quarter, the fund added two new positions. Firstly, the Kazakh fintech company Kaspi. We bought Kaspi at the time of its IPO in 2020 as part of our Emerging small and mid-cap fund, which specialises in emerging and frontier market small- and mid-cap companies. This fund aims to invest more in frontier countries. This has enabled us to observe Kaspi's spectacular growth since its IPO. The company's initial success was in payment systems, making it the dominant and almost unavoidable player in payments in Kazakhstan. Taking advantage of its dominant position in payments, Kaspi then launched bank credit operations, enabling it to become the leading player in the sector ahead of the traditional banks. Finally, Kaspi launched an e-commerce business, which has also enjoyed considerable success. Despite the small size of the Kazakh economy, with a GDP of around 240 billion dollars, Kaspi now has a market capitalisation of around 25 billion dollars, or more than 10% of the country's GDP. The company is expected to grow by 20% a year over the next two years, but already generates over $2 billion in annual profits, most of which is paid out to shareholders in the form of dividends. In the past, Carmignac Emergents has always deployed capital in riskier, so-called "frontier" countries, but this has always been accompanied by in-depth economic and geopolitical research, in coordination with Carmignac's bond teams, in order to avoid unpleasant surprises such as a balance of payments crisis or capital controls. But Kazakhstan has very solid economic fundamentals, with high foreign exchange reserves and public debt at less than 25% of GDP. Helped by the soaring price of uranium, of which they have almost half the world's production, and the sustained rise in the price of oil, of which they are a major producer, Kazakhstan also appears to be politically stable, with the ruling regime having obtained implicit support from their neighbours Russia and China.

We also bought the Indian property company Macrotech Developers, increasing our exposure to the Indian market to 14% (as of 29/03/2024). Our trip to India in February reassured us about this market. The earnings growth of listed companies justifies the high valuations. After 20% growth in 2023, the coming year looks set to deliver growth in the same order of magnitude. Not only is the Indian economy growing at over 7% a year, but this growth looks healthy, with a current account deficit of just 1%, financed largely by foreign direct investment. Modi's government seems to be pro-entrepreneurs, supporting them in their investments and protecting them with taxes on imports of foreign products when these compete with local champions. In addition, most of the listed companies have successfully expanded into the Middle East, making the market more resilient to rising oil prices. Macrotech Developers is India's largest developer and has all the qualities required for inclusion in Carmignac Emergent. Firstly, it is a buoyant market, with construction expected to increase its contribution to GDP from 6% to 13% over the next 6 years. Secondly, a business model with low capital intensity, as property purchases are made off-plan with payment upstream of construction. Finally, impeccable corporate governance. The main reason for the lack of property developers in Carmignac Emergent over the past 10 years was precisely the problems of corporate governance, with the sector being embroiled in issues of corruption and financial opacity in most emerging countries. But Macrotech has a rare quality of governance and has set itself a target of carbon neutrality by 2024.

Carmignac Emergents thus started 2024 on a positive note but reduced its main geographical bets against a backdrop marked by the geopolitical risks, resulting largely from the upcoming US presidential election. The fund's main focus is therefore on stock selection, with financial health and valuations remaining key considerations, as demonstrated by our top 10 holdings, which are made up of stocks for which we have great confidence in terms of valuation. Samsung Electronics and Taiwan Semiconductor are the obvious examples, but so is Eletrobras, a Brazilian utilities company whose valuation is attractive due to predictable cash flows and automatic inflation adjustments. The fund has never been so concentrated, with 34 stocks in the portfolio, and the 10 largest positions accounting for 53% of the fund.