Carmignac Patrimoine through the Covid-19 crisis

This health crisis has highlighted the fragile environment in which markets have been operating for several years. The years of exceptional monetary policies have had the effect of crushing volatility, and of orienting investors towards risky assets. Consequently, as soon as this violent deflationary shock created by the fall in demand and aggravated by the oil shock took place, the equities & some segments of fixed income markets collapsed indiscriminately. To tackle this abrupt surge in financial and economic risk, central banks and governments finally announced sweeping measures that gave markets a breathing spell allowing the market to rally off the lows.

Therefore, over the last weeks, markets have been recovering from their panic mode, encouraged to see the light at the end of the tunnel. But we will soon be able to measure a bit more the concrete economic impact of these lockdowns as the numbers post-February get published and earning season is in progress. Consequently, this period is characterized by lot of hopes, and lot of uncertainty and led us few weeks ago to raise our risk profile, but only to moderate levels in order to smooth out the volatility of our fund.

In the coming weeks, markets will need to adjust to a new clearer direction. There is doubtless a bull case based on what looks like limitless firepower thrown at the problem by policy makers. But several issues remain:

• The European situation where there is a real political matter not just an economic one. The deal agreed at the Eurogroup level is unfortunately still insufficient. All the hope still is on a Recovery Fund, which will need to be negotiated at Head of States Level.
  
• How certain weak emerging markets will deal with this lasting stress on USD funding?
  
• The duration of that negative hit: analysts have brought down their expectations, but could they still be behind the curve?
  
  These in our opinion are very crucial questions and we can’t have all the answers yet; cautiousness & flexibility remain the keys.

• When the wave of the virus has started to shift from the East to the West, we decided to substantially reduce our risks as we didn’t want to deal with uncertainties. We decided to reduce our exposure to peripheral bonds and to Emerging market debt, to cut drastically our net equity exposure and finally to increase our cash holdings.
  
  
• Since then the portfolio construction remains globally cautious, with some selected performance drivers in credit and equity counterbalanced by low risks on sovereign bonds, a gold exposure and a low risk profile on currency. In addition, to navigate through volatile markets, we actively and tactically manage our exposure through equity exposure.
  
  
• Being risk manager is also seizing opportunities when we see a positive asymmetry. The crisis is acting as a ‘catalyst’ to an acceleration of the business cycle, creating dislocations and fueling dispersion in the credit market therefore creating opportunities for bond pickers. Over the last weeks, we have been reinforcing our physical allocation to some idiosyncratic names where we are well paid for the fundamental cost of risk on both primary and secondary markets.
  On equity, the question is, are there some quality names in the cyclical space that could rebound quickly when there is light at the end of the tunnel? Or are there structural issues that will hold back the recovery? This is the question that the equity team is working on currently. For instance, the team is looking at the travel related names to see if there is a specific part of the value chain that will be less structurally impacted. Following this analysis, we have been buying travel related businesses like Amadeus, the IT provider for the global travel and tourism industry and increasing Safran that have robust fundamentals as part of their earnings come from recurring revenues due to the maintenance services.

We maintain an equity portfolio focused on high visibility / non-cyclical companies and we steer clear of those with the heaviest debt loads, as the interruption of business activity could put some of them under a serious cash strain.

• In term of geography, we tend to have a slight relative preference for China compared to other regions. The economic activity is picking up as the lockdown is ending gradually. And even if the country will need to cope with the sharp fall in external demand, currently the balance of payment is improving supported by lower oil and commo products as well as the shutdown of global tourism. We are positioned on domestically oriented names, benefiting from policy support and LT trends of Chinese New Economy Sectors (eCommerce, healthcare, data centers).
  

• In terms of sectors, we seek exposure to disruptive thematics, linked to the ongoing shift in habits, and some of them accelerated by lockdowns. For example, as people are stuck at home, we see an increase in the development of e-commerce, which could become further anchored in consumer habits. Precautionary measures insisting on avoiding physical contact have also led to the increase use of digital payment, supporting the development of fintech. Stay-at-home dynamics have also increased the use of streaming and video games, which in turn is increasing demand for software, cloud and semiconductors.
  

On the fixed income side, we manage actively the overall modified duration of the Fund which is currently at low level.

• On sovereign debts, selectivity is needed. In developed markets, we favor countries where Central banks have the most leeway like the US where Carmignac Patrimoine is mainly positioned on the long-end of the curve (10 years and 20 years) and Australia. While the ECB’s actions support peripheral debt, we don’t think they offer a favorable risk/reward yet as both debt is expected to grow and growth is expected to be particularly weak, therefore we benefited from higher liquidity provided by central bank actions to reduce further our exposure to eurozone periphery.
  

• On credit as mentioned above, we are selectively buying back some names which we think have robust balance sheets.
  

On currency, the serious pressure on US yields convinced the Fed to pump unprecedented amounts of liquidity into the market. Now that the Fed’s interventions – announced as being unlimited – are seen to have stemmed the dollar liquidity strain, the appreciation of the greenback should slow. We have therefore kept the euro – the reference currency for the fund – as our primary currency exposure in order to limit exchange-rate risk in an abidingly uncertain environment.