These breakthroughs may well push market valuations up towards their equilibrium and have prompted us to raise the level of equity exposure of our global funds.
First, we believe that the Chinese stock market will make up for lost ground, at least in relative terms, owing to the reversal under way in its monetary policy. Furthermore, the inevitability of the ECB stepping in as the lender of last resort will compound the euro’s depreciation, which began last summer.
The theme of an improving standard of living in emerging countries has again been increased from 34% to 37.3% of Carmignac Investissement’s assets. We believe that the risk aversion which penalised emerging markets in 2011 has created quite an attractive opportunity.
We have increased the weighting of defensive stocks from 13.3% to 14.2% and significantly scaled back, from 10.7% of assets to 7.1%, the theme of innovation. At the same time, we have left our exposure to gold mining unchanged at 14.4% thanks to the interventions of central banks all over the world, particularly as gold mines have a lot of catching up to do relative to the metal’s price.
We have increased our energy component, from 12.2% to 13.9%, while cash is at 9%.
The portfolio should benefit from the improvement in equity investment conditions and the absence of any exposure to the euro should safeguard it against the persistent risk of further deterioration in Europe, to which the ECB is now responding with measures that are devaluing the single currency.
Bond performance drivers
Corporate bonds should be a major source of performance for the bond component of Carmignac Patrimoine in 2012.
First of all, the ECB’s three-year credit facility offered to banks has eased volatility, creating an environment likely to boost investors’ appetite for risk. Furthermore, with an average rating of BBB-, our credit portfolio enjoys an attractive yield of 6.4% for an average duration of 5.6 years.
Lastly, companies’ fundamentals remain solid owing to the very prudent attitudes of companies on either side of the Atlantic.
In conclusion, the technical aspects of the market remain favourable and investors have, for the most part, rebuilt significant cash positions.
Given the risks surrounding the resolution of the European crisis will remain high, we are sticking with our cautious approach to European government bonds. As regards US bonds, ten-year yields may now be considered a by-product of monetary policy. If monetary authorities were to change tack, this would trigger a cycle of rising yields. As this seems unlikely for the time being, we shall hold on to US bonds for their safe-haven appeal.
Against this backdrop, our allocation of developed countries’ government bonds has remained stable at 10.4%.
The emerging government bond component has also remained unchanged at 2.5% of assets with 1.7% invested in local emerging debt and we plan to rebuild this component through selective investment. The environment should gradually begin to favour emerging local debt owing to a considerable drop in inflation indices, thereby allowing further interest rate cuts.
Over the course of Q4 2011, our exposure to the euro was kept very low and stood at 10% at the end of the year. In an environment where European monetary policy is bound to become more expansionist, we believe the euro’s depreciation relative to the dollar and yen will soon pick up pace. Our cash component, which is predominantly invested in US and Japanese treasury bills, grew considerably in H2 2011 and amounted to 24% of assets at year-end.
What constituted a safety net in 2011 should now allow us to benefit from attractive risk premiums on both equities and corporate bonds in 2012.
