The activism of the ECB and the FED: strong impact on the markets
During the third quarter of 2012, the ECB decided to deal with the issue of systemic risk in Europe with determination. The consequences of Mario Draghi's courageous position are considerable. By declaring its intention to purchase the sovereign debt of troubled countries in unlimited amounts, provided that these countries adopt credible programs to consolidate their public finances and improve competitiveness, the ECB assumes the role of lender of last resort. The contraction in the activity of countries that undertake to reduce their public deficits and adopt structural reforms can now be financed by the markets, reassured by the existence of this potentially unlimited support. The measures announced by the ECB were joined, in the United States, by a new monetary easing ("QE3") of unprecedented aggressiveness. No global amount has been indicated for this support to the debt markets, nor a specific duration. It was simply specified that $40 billion of mortgage loans, or just over half of the monthly amount of net issuance across the entire mortgage and government bond market, would be purchased each month and that the situation would be reassessed according to the evolution of the labor market. Therefore, the decisive interventions undertaken by the ECB in early August and by the FED in early September contribute to global monetary easing.
However, the macroeconomic context in Europe remains worrying
As per the bailout mechanism announced by the ECB and provided that they are determined to undertake far-reaching reforms, troubled European countries are finding room for maneuver in the management of public finances. Recessionary pressures in Europe could thus be eased, especially as the International Monetary Fund urges the implementation of more moderate reform plans. The decisive position taken by Mario Draghi to avert the risk of implosion of the euro is of considerable importance as it suggests a substantial reduction in the risk premium which is holding back financial and industrial investment. However, economic fundamentals in the euro area remain misguided.
In the US, companies suffer from uncertainty related to the 'fiscal cliff', but the Fed is determined to support the economy
Unlike what occurred previously, QE3 intervenes when the growth of the US economy seems to stabilize at a rate close to 2% and advanced indicators, weak in the second quarter, show signs of recovery. The guarantee of maintaining an accommodating policy strengthens domestic demand by creating a wealth effect for households, encouraged by the revaluation of their real estate and financial assets, at a time when real incomes are registering a slight increase (+1,75%). This measure has another advantage over previous easing policies, as it should not lead to a rise in commodity prices, given that the more moderate growth of emerging countries is holding back their appreciation. The main objective of QE3 is to reduce the risk of a "fiscal cliff" by assuring households and businesses that all the necessary liquidity will be provided if tax increases and public spending cuts are introduced on 10 January, in the event of no agreement between President Obama and Congress. This reassurance is important, given the possible recessionary effects that would be caused by the automatic application of a reduction in the budget deficit of 3% of GDP.
The emerging universe looks encouraging
China, despite a phase of transition of powers at the top of the state, demonstrates inspired proactivity in the management of economic activity, using the stabilizing effect of public investment to maintain growth at a level close to 7% . The rebalancing in favor of increasingly dynamic consumption (+14%) continues, while inflation is now under control, particularly in the real estate market. In India, the political situation unblocked significantly in September. Recently expressed reform intentions allow wider access for foreign companies in some important sectors of the Indian economy and for international investors in the local debt sector. This evolution should lead to a continued flow of foreign investment into India, which is asset-friendly and rupee-friendly. Finally, the Central Banks of the main emerging countries take action. In the first days of October, those of Brazil and Korea followed the example of the Central Banks of developed countries, adopting an activism conducive to growth. The low level of inflation makes these decisions possible, which create a favorable environment for local currency debt, while the desire to moderate the appreciation of currencies against a weak dollar leads to more accommodative monetary policies in this universe.
The current environment is characterized by antagonism between abundant liquidity and a lackluster global macroeconomic outlook
The activism of Mario Draghi and Ben Bernanke has greatly improved the outlook for the equity markets. The eurozone now has an ECB ready to play the role of lender of last resort. This event, which we hoped for, is the most important in recent months because it vigorously removes systemic risk in the euro area. The risk premium of the equity markets is thus destined to gradually decrease. These positive effects, however, do not make us forget the impact that the strong recessionary pressures caused by the reduction of the current leverage effect have on companies' ability to produce profits.
We have opted for an offensive tactical positioning starting in August
In a context where the ECB decision has had a significant impact on reducing systemic risk and where the abundance of global liquidity remains current, our global management has adopted an offensive positioning since mid-summer, characterized by equity exposure rates maintained at high levels. However, we remain particularly attentive to macroeconomic developments that could lead us to revise this positioning.
We sold positions in Chinese banks in favor of a selection of European banks
Carmignac Investissement's portfolio underwent an important change: Chinese banks were subject to arbitrage in favor of a selection of European banks, which accounted for 5% of the Fund's assets at the end of October. The former were liquidated when it became clear that the development of their credit business would penalize margins. The latter were acquired when the European systemic risk was removed thanks to the initiatives of Mario Draghi. In this context, the theme of improving living standards in emerging countries was reduced by 5%, going from 43,3% to 38,4% of Carmignac Investissement's portfolio.
Defensive stocks were strengthened
Our investments in defensive stocks have been strengthened and represent 14,7% of assets. Investments in gold mines were increased to 13,1% of the portfolio, mainly due to a valuation effect and also thanks to the strengthening of our position in Eldorado Gold in Turkey. The theme of innovation was privileged (8,6% of assets), while natural resources were slightly reduced (19,6%)
Positions in corporate bonds increased to 26% of Carmignac Patrimoine's assets.
We increased our positions in corporate bonds, as the concurrent intervention of the ECB and the FED doubly benefited carry trade strategies, on the one hand improving visibility on global activity and on the other hand significantly reducing the supply of bonds in the market American. Based on our overall positive outlook on corporate bonds, we concentrated our purchases in the heavily discounted European financial sector. However, our reservations about this sector have not completely dissipated. We therefore concentrated the acquisitions on the maturities affected by the interventions of the European Central Bank. We therefore hold exposure to Spanish and Italian bank bonds with maturities of less than 3 years, issued by the most solid institutions and mainly in the form of highly rated senior debt. These positions represent nearly 6% of Carmignac Patrimoine's assets.
The segment of government bonds of developed countries was slightly increased
IThe Government Bonds segment of developed countries was slightly increased, going from 11,6% to 14,7% of assets. Government bonds remained stable overall during the third quarter, despite the sharp decrease in systemic risk. We took profits on German government bonds and opted, from now on, for more tactical management. Instead, we retain 14% US Treasury bonds.
Investments in government bonds of emerging countries have been strengthened
The segment of government bonds of emerging countries was slightly increased, passing from 3,1% to 4,3%. The economic slowdown is also having its effects on emerging economies, leading to more accommodating interest rate policies. Depending on the country, we have adopted a differentiated positioning on the yield curve according to the monetary policy cycle. The exchange rate risk associated with these positions was hedged against the euro.
We have rebalanced the exposure in favor of the euro, while maintaining the dollar component of the portfolio
The exposure to the euro was increased, based on the strategy linked to the reduction of the European risk, but also taking into account the aggressiveness of the US monetary policy and its effect on the dollar. While down sharply, we maintain significant dollar exposure as it balances portfolio risk against maximized equity exposure while including a sector allocation in favor of growth stocks as well as bank selection European.
