Carmignac Investissement: Letter from the Fund Manager

Over the quarter, Carmignac Investissement posted a positive performance of +7.86% (A EUR share), above its reference indicator (+6.42%). The fund ended the year with a performance of +18.91%, outperforming its reference indicator¹ (+18.06%).

Global financial markets experienced a roller coaster ride in 2023, driven by inflation-focused monetary policy, stronger than expected economic data and geopolitical tension. In this context, the equity markets of developed countries rallied both in the United States (+24% for the S&P500) and in Europe (+16% for the Stoxx Europe 600) mainly driven by valuation multiple expansion. Easing inflation, a resilient US economy and the prospect of lower interest rates buoyed investors, as illustrated by the strong finish to the year.

In the US, the broader market's gains were driven largely by the Magnificent Seven, which includes Apple, Microsoft, Alphabet, Amazon, Nvidia, Meta and Tesla. This group of stocks, at the forefront of technological changes, accounted for about two-thirds of the gains in the S&P 500 this year, following a significant jump in their earnings. More specifically, the surge in equity markets in the first half was primarily driven by the flourishing artificial intelligence (AI) investment theme, with the Magnificent Seven significantly outperforming the rest of the market despite tighter financial conditions. Although there was a set-back towards the end of the summer due to an unexpected rise in yields, falling inflation prompted central bankers to halt their monetary tightening which boosted valuations. Investor optimism regarding potential rate cuts in 2024 provided a tailwind for growth companies at the end of the year. Overall, the performance of these stocks in 2023 was impressive, particularly with the Nasdaq delivering an outstanding 43% return, while defensive sectors such as Utilities, Staples and Healthcare posted poor returns, as did Energy.

Emerging markets once again lagged behind their developed counterparts, largely due to the struggles faced by China (-16.8% for the Hang Seng). Expectations for an economic recovery after the Covid-19 mobility restriction disappointed, and China’s structural challenges, especially in the property market, dampened investor confidence. Despite the Chinese government's efforts to stimulate the economy since mid-year, concerns about deflation and the global slowdown have added to the pessimism in local markets. In Latin America, Mexico (+31.6%) has greatly benefited from the US nearshoring policy, which aims to bring production lines closer to home. On the other hand, Brazil (+28.4%) has successfully managed to control local inflation, positioning itself as one of the first countries to reverse its interest rate policy which benefited its equity market.

In 2023, amidst a narrow market rally, Carmignac Investissement demonstrated its ability to outperform global markets through wise stock-picking. Our decision to overweight the Magnificient7 throughout the year has proven to be successful. Although we were only invested in 5 out of the 7 companies (excluding Apple and Tesla), we made up for it by allocating a higher weight to Microsoft, Meta and Amazon. Regarding artificial intelligence, the release of OpenAI's chatbot ChatGPT in late 2022 generated excitement among users and investors, benefiting the entire ecosystem from semiconductors to cloud-computing. As a result, our investments in companies like Microsoft, AMD, and Nvidia were up sharply. Overall, our convictions in the tech sector, the largest sector weighting in the portfolio, performed well over the year led by both the AI phenomena and the end of the monetary tightening.

Another contributing factor was the emerging theme of weight reduction medicines, brought to market by Eli Lilly and Novo Nordisk, two of our significant holdings. These companies significantly outperformed the struggling healthcare sector, which experienced one of its worst years in relative terms. As a result, our stock selection in this sector more than compensated for our overweight position. Elsewhere, the resilience of the global economy also benefited specific stocks such as Hermès, which continued to display stable and organic growth, and our aerospace convictions (Airbus, General Electric, Safran) which benefited from the ongoing strength of the travel industry.

Finally, our investments in China did not meet our expectations. Despite the appealing valuations, the consumer discretionary stocks in our portfolio were negatively impacted by the country's weak economy. This was evident in the decline of online retailer JD.com and Alibaba. Our Chinese exposure was significantly reduced over 2023.

The year 2023 was a highly successful one for equity markets, primarily due to the impressive performance of a limited number of stocks and the resurgence of valuation multiples. In the US, multiples have reached a historically high level (19.6x for the 12-month forward price-to-earnings ratio). It is challenging to envision these multiples expanding further in 2024 given the multiple rate cuts (6!) already priced in by the market. On the fundamentals, we will closely monitor corporate earnings over the year, which have experienced a mixed 2023. Despite the expected economic slowdown, the market anticipates earnings to increase over 10% across major regions, which would be robust after little growth in 2023. Given this complex landscape, it is difficult for us to form a predetermined view on the market's overall expected performance for 2024.

Nevertheless, we believe that specific opportunities are likely to arise as we expect market leadership to broaden in 2024. While we do not expect the Magnificent Seven to decline materially, we also do not anticipate the same outperformance versus the overall market as we saw in 2023. For this reason, we decided to take some profits on these names at the end of 2023, diversifying performance drivers for the fund. We continue to see compelling opportunities around artificial intelligence – both AI related infrastructure (AMD) and AI enabled digital advertising (Meta, Snap) - and weight reduction. . We have added new positions in luxury cosmetics (Estee Launder) and cybersecurity (Fortinet) were we see a clear potential for outperformance in 2024.

Finally, the upcoming rate cuts led by the Fed Chairman, Jerome Powell, are expected to result in a depreciation of the US dollar, which will be advantageous for emerging markets. With the Chinese economy gradually stabilizing, emerging markets are likely to provide opportunities for performance and diversification. However, we are currently awaiting a higher conviction to fully re-engage with China. In the meantime, we are gradually investing in proxies in developed countries such as LVMH and Estée Lauder, and exploring opportunities in Latin America (Banorte) and India (Kotak).