Carmignac Patrimoine: Letter from the Portfolio Manager

In our previous report, we wrote: “A victory for the Democrats in the White House and Senate would clear the decks for a sweeping multi-year stimulus programme oriented towards demand.” That victory has now come to pass and has set the stage for a more Keynesian approach with three key components: an infrastructure programme tied to the energy transition; redistribution of income to the middle class, with policies spanning education and healthcare; and greater regulation of Big Tech. US policymakers will address these issues over time, whereas the pandemic calls for a new aid package now that includes cheques for low-income households, an extension of unemployment benefits and federal aid to state governments. Meanwhile, in December the European Central Bank (ECB) met market expectations on the size of the additional QE measures. The Bank has extended its asset purchases for another fifteen months to cover a large supply of bonds expected all the way up through the first quarter of 2022 and “preserve favourable financing conditions”. The ECB will henceforth be acting more to hold yields steady than to lower them.

Continued support from Central banks and governments has continued fuelling the recovery in equities. It has been driven by growth stocks from the lows of March. However, in the last months of the year, value stocks rebounded sharply, both in the developed and emerging world. In fact, the news of a Covid 19 vaccine in November acted as an additional boost for markets. The names that had lagged the most in 2020, namely airlines, banks and energy companies, rallied sharply on the back of this news and reduced some of the underperformance that had occurred versus their growth stock counterparts.

Over the quarter, on the equity side, the Fund has benefited from its wide and diversified geographic exposure. Especially, our high convictions in China recorded substantial gains, leading us to outperform our reference indicator. Also, our investment approach focusing on secular growth has continued to pay off, illustrated by our gains in the technology, healthcare and consumer space. In these sectors, we were able to generate significant alpha thanks to some of the long term thematics we focus on. These include climate change, that led us to invest in electric car companies and battery producers, notably in China. Finally, we added in April/May names that we felt had suffered a lot from the crisis but would benefit from steady reopening of economies. Among them, Amadeus, a Spanish IT provider for the global travel and tourism industry and Safran, a jet engine manufacturer focused on short haul tourism flights. These positions allowed us to mitigate the impact of a value catch up towards the end of the year.

Over the long term, we believe secular growth stocks that we find in Tech and Internet, but also Health Care & Consumer, will keep performing well because of their superior growth prospects and business models. Nevertheless, we are cautious on high valuation stocks and took profits on the key beneficiaries of the “stay at home” economy and Chinese names.
It looks like three key themes will be shaping events in 2021:

• The cycle of falling yields came to an end in the fourth quarter of 2020. Our flexible approach to risk management will allow us to actively manage the potential impact of rising interest rates on our bond portfolio and on the valuations of certain stocks we hold.
  
• Covid-19 vaccination campaigns in 2021 should pave the way to a gradual return to normal lifestyles, and with it to higher revenue in sectors such as travel, energy and banking that are dependent on such a return to normal.
  
• Lastly, fiscal and monetary policy support will remain crucial to easing the transition to growth fuelled entirely by economic expansion. In the US, such support will be accompanied by a dual change of policy orientation: the new Democratic administration marks the revival of Keynesian-style stimulus policies, and the Federal Reserve is now aiming for an average inflation rate of 2% rather than a hard target of 2%, which suggests inflation may at times move above 2%.² We expect this combination to lead to dollar depreciation and a pick-up in world trade – two factors that will work to the advantage of emerging markets.