Carmignac Portfolio Emergents: Letter from the Fund Manager

Carmignac Portfolio Emergents recorded a fall of -0.31%² during the first quarter, compared with a fall of -1.33% for its reference indicator³.

2025 has thus begun cautiously, pending the negotiations on reciprocal tariffs, which promise to be challenging for all emerging markets, and particularly China. But this beginning of 2025 marks above all the end of US exceptionalism. For more than a decade, asset allocators had only one thing to do: invest in the US equity market, which almost certainly guaranteed continued outperformance. And every technological advance only amplified this trend. Investors also had to avoid emerging markets, which only brought volatility and underperformance. This has led to a situation of massive under-positioning on Emerging market Equities. By looking at funds whose benchmark index is the MSCI, we see an average allocation that is more than 50% lower compared to the neutral level, with the Emerging market allocation being 4.8% at the beginning of 2025 compared to an index weighting of emerging markets of 10.1%⁴. If investors were to take a neutral position in these markets, this would lead to flows of more than 1.5 trillion dollars, or about half of France's GDP. And this only concerns part of the asset management industry.

The end of US exceptionalism can be explained mainly by two factors. First, the political factor. The arrival of Donald Trump and his isolationist ideology marks a decisive change in the economic paradigm. The globalisation of the economy has favoured the large American multinationals for half a century, which has enabled the excellent stock market performance of US companies whose costs have benefited from cheap labour, particularly in Asia. The desire to repatriate the manufacturing base to American soil should reverse this trend. The second factor relates to the technological advances originating in China, which we have been reporting on in these quarterly reports for several years, but which were underestimated by markets. The release of DeepSeek in January enabled the whole world to gauge the Chinese capacity to develop Artificial Intelligence language model tools comparable to those originating in Silicon Valley. Furthermore, these models are more efficient than the American models and should therefore be able to develop without the most advanced chips produced by Nvidia. At the same time, the Chinese have succeeded in developing a spectacular technological ecosystem around Huawei with progress in crucial areas such as memory (DRAM and Nand), semiconductor foundry, and GPUs. Markets are beginning to glimpse Chinese supremacy in the field of high technology, as with electric cars, which have enabled China to become the world's leading car exporter in just a few years. BYD's latest models batteries can be recharged in 5 minutes, which shows an advance over Tesla and other producers. The combination of these two factors should lead to a reallocation of portfolios towards Emerging markets to the detriment of American markets.

We remain constructive on the Chinese markets. Although structural problems remain, we are seeing a change in perception. Six months ago, China was considered uninvestable by investors. Markets now realise that geopolitical problems are hurting China, but not destroying it. Chinese exports to the United States represent only 3% of its GDP and China now exports more to emerging countries than to OECD countries. Moreover, US export controls have not had the intended effect. They have had the opposite effect, pushing China to invest more in the technological supply chain with significant progress.
The Chinese market represents 26.2% of our portfolio⁵, which is underweight compared to our ref. indicator. On the other hand, the composition of our portfolio is significantly different from that of the indices, as we invest mainly in high-tech companies, avoiding banks, cyclical companies exposed to real estate, and exporting stocks vulnerable to the implementation of tariffs by the US president. During the quarter, we strengthened our position in Didi (2.8% of the portfolio), the Chinese equivalent of Uber. In addition to having a very profitable business in China, the company is expanding in Latin America, successfully competing with Uber, and is preparing to launch robotaxis this summer, and are very well positioned in this very promising market.

We are keeping a significant allocation in India, where the long-term outlook remains promising despite its weakness since the last quarter of 2024. Our trip to India confirmed our favourable outlook for the country (strong growth, political stability, healthy current account), and the recent correction offers us interesting entry points.
Over the period, we strengthened our Indian portfolio (21.4% of the fund) by initiating a new position in PolicyBazaar, an insurance marketplace. Insurance in India is a very promising market because it is underpenetrated compared to other emerging countries. PolicyBazaar allows us to gain exposure to this sector without taking on the balance sheet risk, as they simply take a commission on new products purchased in India. Their market share has risen to 16%⁶, thanks to remarkable entrepreneurial success, and they have begun to tackle the bank credit market with comparable success. Our allocation to Southeast Asia excluding India remains low (2.5% of the portfolio), due to geopolitical tensions and the likely arrival of high tariffs, which should lead to a decline in economic activity and investment.

We are reassured about our Latin American exposure (21.0% of the portfolio), which should benefit from the new economic order. Mexico seems relatively unaffected by Trump's initial announcements, which reinforces our view that this country should take significant market share in US imports, to the detriment of China and Southeast Asia. The rest of the continent, led by Brazil, should benefit from the geopolitical tensions between the United States and China. The Chinese are likely to redirect their raw materials supplies to Latin America rather than buying from American farmers. The fall in the price of oil, on the other hand, is likely to impact Latin American currencies, which is why we have put in place hedges against the Brazilian real and the Mexican peso.

Emerging markets began 2025 outperforming developed markets, which is unusual given the historical trend of underperformance in recent years. Paradoxically, the uncertainty generated by Donald Trump's aggressive policies seems to have benefited Emerging markets. The introduction of tariffs and the abandonment of its key allies seem very damaging for the United States and are leading to a trade diversion away from the US to Emerging countries (the tariffs imposed by China on US agricultural products in retaliation could benefit countries such as Brazil and Argentina).
In this context, we are maintaining our measured allocation to China, with a focus on domestic companies, a significant exposure to India, and decent exposure to Brazil and Mexico, which seem to be doing well.
In addition, we have reduced the cyclicality of the portfolio to protect ourselves against the uncertainty of Donald Trump's policies. The Fund focuses on stock picking, with the financial health and valuations of companies being our main considerations in portfolio construction, as evidenced by our top ten holdings, which are made up of companies in which we have great confidence in terms of valuation.

Carmignac P. Emergents fund positioning as of 31/03/2025