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Carmignac: 5 key China and EM themes of 2014

Carmignac: 5 key China and EM themes of 2014

From the Chinese slowdown and the threat of scarcer liquidity caused by the announcement of a change in US monetary policy, to the resulting sell-off in the Spring, 2013 has been a rollercoaster year for emerging markets.

Over the last few weeks, however, prospects for emerging economies have picked up in a context of delayed return to normal by US monetary policy makers, and an improving Chinese economy.

Haiyan Li-Labbé, Chinese analyst for Carmignac Gestion, has outlined the main challenges and opportunities awaiting China and other major emerging markets in 2014.

The Paris-based asset management firm invests actively in global emerging markets, with funds including the Carmignac Emergents, managed by Simon Pickard, and the Carmignac Emerging Discovery, co-managed by Xavier Hovasse and David Park.

1. China expected to undertake structural reforms

'The third session of the 18th Communist Party Conference held this November has put forward major reforms intended to contribute to structural improvements in the economic outlook,' Haiyan Li-Labbé pointed out in an investor note.

Among the main measures planned, which should be completed in 2020, are:

  • Fiscal reform - The current tax system in China is expected to undergo extensive changes, resulting in the roles and responsibilities of local governments and central government being redefined, in order to develop social policy and encourage consumer spending rather than excessive savings.
  • Anticorruption campaign - If stepped up, it would help to improve economic efficiency.
  • One-child policy - The law may change to allow families to have two children, if at least one of the parents is an only child.
  • State-owned businesses - New measures are in the pipeline, aiming to bring in professional management teams and increasing dividend payments to achieve more efficiency.

2. The Yuan: a trade and reserve currency in the making?

According to Li-Labbé, the strength showed by the Yuan during the May/June emerging market crisis, compared with other EM currencies, could add credibility to China’s plans to establish a trade and reserve currency.

'That would instil confidence in the region’s various players, while consolidating China’s position,' she said.

3. The wind of reform is blowing across Mexico

Mexico has been one of the most appealing emerging markets for some time now, and recent elections have paved the way for significant reforms.

'President Peña Nieto, whose popularity seems to be at a peak, intends to undertake major changes aimed at ending monopolies, including those in the energy sector with Pemex,' Li-Labbé observed.

'There is enormous potential in the energy sector, particularly for deep water exploration and shale gas.'

4. Indian elections in May 2014

India holds elections in May 2014, which could unleash a series of initiatives in a country in serious need of reform.

'Lack of investment in India has been a real problem over recent years,' said the Carmignac analyst.

'The forthcoming elections may therefore lead to a change of government which would be conducive to the development of new projects.'  

5. Sector rotation brought by new opportunities

In light of the positive developments in emerging markets, Li-Labbé said in her note, more defensive segments such as consumer staples have suffered from sector rotation, as investors switch to sectors which are more sensitive to economic cycles, although, she concedes, food and consumer goods remain a strong long-term theme in emerging countries.

'New opportunities are available to investors in sectors such as industry, aerospace and robotics where high quality stocks capable of benefiting from market rallies can be found,' she concludes.

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Simon Pickard
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