An environment of high inflation and elevated interest rates will create investment opportunities in manufacturing, Japanese stocks and emerging-market debt, according to Carmignac.
Frederic Leroux, a member of Carmignac’s investment committee, said demographic trends, a shift away from globalisation and towards the reshoring of production capacity, as well as the energy transition and the end of Pax Americana, make it likely that both inflation and interest rates will remain high in 2023 and investors should look at themes that will perform well in an inflationary environment.
In his latest investment note, Leroux said: “Our fixed income portfolio was impacted by the war in Ukraine, but has since recovered thanks to the active way in which we managed our investments, such as by positioning our portfolio for the prospect of higher bond yields.
“Corporate bonds are another area of opportunity, as investors now have an extremely bearish stance on this asset class – to the point where yields are factoring in default rates that we feel are too high relative to the economic fundamentals.”
Looking to the medium term, Carmignac expects the US dollar to weaken during the next cyclical upswing, which would make emerging-market debt more attractive. Free from the grip of a strong dollar, central banks will be better able to implement more dovish policies and pursue a trajectory of monetary easing, the firm said.
The prospect of recurring waves of inflation has also made Carmignac reconsider investment themes across equities which had been set aside in recent years. This includes the significant role oil and gas majors are likely to play in the transition to renewable energy. According to Leroux, “pragmatic investors” could choose to work with transitioning firms committed to promoting clean energy.
In the same contrarian bent, Leroux believes Japanese stocks should feature on investors’ radars over the coming year.
He said: “These stocks have fallen short of their potential to deliver strong returns and foreign investors have been shying away from them for years, yet Japanese companies are now underpriced according to all standard valuation methods.
“Ironically, the factor that could trigger a rally in these stocks is an interest-rate hike by the Bank of Japan in response to sticky inflation. Higher interest rates would help spark a sustained appreciation in the yen, which would be a draw for foreign investors who have been put off by the country’s feeble currency for the past 12 years. In this regard, investments in Japanese banks and in sectors that stand to benefit from a rebound in the domestic economy could be attractive ways to regain exposure to the country.”
Carmignac also sees long-term opportunities in the manufacturing sector, with firms receiving a boost from efforts to step up the transition to clean energy and to reshore production capacity in strategic industries after the pandemic highlighted how many countries are dependent on distant trading partners.
Leroux added: “The renewed cyclical swings against a backdrop of structurally higher inflation will prompt a reshuffle in financial markets. Many companies and sectors that, owing to the long period of anaemic GDP growth, have been underpriced and have taken a back seat to growth stocks – to the point of nearly being forgotten – stand to gain from the next cyclical upswing, which we believe will occur after the disinflationary economic slowdown that’s now taking hold.
“This upswing will also create attractive opportunities for fund managers capable of benefiting from the higher interest rates and obtaining exposure to emerging countries.”
