Carmignac P. Emergents: Letter from the Fund Managers

Over the second quarter of 2024, Carmignac Portfolio Emergents gained +0.17%² compared with +6.10%³ for its reference indicator, bringing its year-to-date performance to +5.61% compared with +10.79% for its index. This underperformance relative to our reference indicator stems from our Chinese and Latin American portfolios.

After the solid rebound of Chinese equities in March/April, the positive momentum was reversed, and the Chinese markets suffered from gloomy economic data and fears linked to the US elections. The country also continued to suffer from the fragility of its property sector, with prices continuing to fall. As for the government's stimulus measures, China faces a dilemma between maintaining monetary independence and the stability of the foreign exchange market, which is reaching a critical point as the yen continues to depreciate.
Against this backdrop, consumer stocks lagged, while cyclical sectors performed better. As a result, we saw our holdings in Vipshop, New Oriental Education and Anta Sports go down.
We believe that the downturn is excessive, and we are maintaining our positions in our top Chinese convictions, some of which have only a third of their market cap in cash and are making share buybacks (e.g. Vipshop). The fund's China weighting is now in line with its reference indicator (25% as of 28/06/2024).

After two excellent years on the equity markets, Brazil (8.9% of the fund's net assets) and Mexico (8.2%) fell sharply in the first half of 2024. These declines were partly due to falling commodity prices, particularly agricultural commodities (in the case of Brazil). But the main factor behind these downturns is political.

In Mexico, although Claudia Sheinbaum's victory in the presidential elections last June was expected by the markets, but her score was much higher than expected. The legislative elections, which took place on the same day, gave the ruling Morena party a super-majority in Congress, enabling them to change the Constitution. However, a constitutional reform proposed in February by the incumbent President Lopez Obrador was perceived as market unfriendly. The election result led to a correction in the equities market, which penalized the fund. Nevertheless, we remain confident in the Mexican market's ability to perform well in the years ahead, thanks to the benefits of nearshoring⁴ (the relocation of production lines), which should accelerate after the US presidential election.
In Brazil, the bond market fell sharply, which also led to a fall in the equities market, due to fears over fiscal slippage reminiscent of those of the previous Workers' Party government under President Dilma Roussef, which swept away our two holdings, Eletrobras and Equatorial. However, we believe that President Lula will adopt a more pragmatic approach, and we expect a return to fiscal and monetary orthodoxy, which should enable our stocks to rebound. Eletrobras and Equatorial are strong convictions with attractive valuations and significant potential for a rebound over the coming months.

South-East Asia markets performed well over the quarter. India continues to benefit from its large domestic market and is expected to have the world's highest GDP growth 2024. Also, the political continuity, with Narendra Modi sworn in as India's prime minister for a record third time, signals a continuation of economic reforms, and therefore bodes well for the markets.
In the second quarter, we benefited from the progress of our Indian investments, in particular our positions. We therefore benefited from our positions in the consumer goods company Dabur India, the insurer ICICI Lombard and the quality real estate company Macrotech Developers.

As for Taiwan, the country continues to benefit from its technological advances in the semiconductor industry, driving local markets higher.
In this region, our portfolio delivered a positive performance over the period, particularly Taiwan Semiconductor, the world leader in the foundry business, which continued to benefit from strong demand for AI-related chips.
Given our strong conviction in these economies, we have increased our allocation to India (16% of the Fund) and Taiwan (13%).
In this respect, we initiated two Taiwanese positions, both operating in the semiconductor sectors: Elite Material and Lite-On.
Elite Material is a Taiwanese mid-cap company manufacturing Copper Clad Laminates for printed circuit boards (PCB). The company has a high-end positioning in the supply chains of the world's biggest companies, such as Apple, Google and Cisco. Their customers also include major Chinese manufacturers such as Oppo and Vivo. The company meets the requirements of our investment process, with a healthy balance sheet, high margins (around 28%⁵) and a return on invested capital (ROIC) averaging 18% over the last two years, consistently higher than their cost of financing. In addition, Elite Material has a net cash position, enabling it to invest and improve its competitiveness (new plants in Malaysia).

The second company, Lite-On, is a manufacturer of electronic components, also operating in the cloud market. The company manufactures opto-semiconductors, power products for PCs (customers include HP, Dell, Lenovo) and game consoles (Sony, Nintendo), as well as automotive lighting products. It is a mid-cap company with a market capitalization of $7.7 billion but an enterprise value of $5.5 billion⁶. It therefore has a net cash position on its balance sheet, the result of a very solid cash generation profile and quality management.

After a good start to the year, we cannot be satisfied with the Fund's recent performance. After adjustments, we are confident in the Fund's current positioning and remain convinced that sticking to our investment process is the best way to deliver strong risk adjusted returns over the long-term.

We are maintaining a concentrated portfolio (35 stocks) with a balanced exposure, combining quality stocks with high visibility (Asian Tech, India, Mexico) with quality companies trading at very attractive valuations (China, Brazil).
After nearly 16 years of pronounced underperformance by emerging countries, the financial markets seem to have little appetite for this asset class, which presents significant political, geopolitical and macroeconomic risks, in addition to the traditional financial risks. We note, however, that this is reflected in very low valuations, sometimes even absurd ones, as in China and Brazil. We therefore believe that our portfolio should include good growth stories from countries such as India, Taiwan and South-East Asia. But also, stocks in less attractive markets whose valuations are clearly attractive, especially when corporate governance gives us confidence in the return to shareholders in the form of dividends or share buybacks.

Sources: Carmignac, Bloomberg, company data, CICC, BoAML, 28/06/2024.