Emma Wall: Hello, and welcome to the Morningstar series, "Why Should I Invest With You?" I'm Emma Wall and I'm joined today in Paris by Carmignac's Head of Emerging Markets, Xavier Hovasse.
Hi, Xavier.
Xavier Hovasse: Hi, Emma.
Wall: So, we're here today in Paris and I went this morning to the Carmignac Investment Conference. And we were talking about the outlook for emerging markets in 2017 and there were three countries which you mentioned that I thought deserved particular focus, the first of which was Mexico.
Hovasse: Yes, of course, Mexico's outlook has changed dramatically since the election of Mr. Trump. As you know, he wants to renegotiate NAFTA, and this is going to have a dramatic impact on the Mexican economy because 30% of the Mexican GDP today is manufacturing exports, most of which are going to the United States.
Since Trump was elected, the Mexican peso has lost 15% of its value. Inflation anticipations are going up. The central bank is hiking rates which is going to hurt the domestic economy. So, we have changed our portfolio a lot, reducing our exposure to the companies which are dependent on the domestic demand. We bought companies like CEMEX or Grupo México, which are more global
Wall: And the second country I wanted to talk about is one equally affected by the election of Donald Trump as the 45th President of the United States, and that's Russia. How has your outlook for Russia changed in 2017?
Hovasse: Well, the outlook for Russia has improved a lot, obviously. There are lots of tailwinds for Russia. The OPEC deal is supporting the price of oil, which is obviously the key variable for Russian assets. Global growth is improving. And the political environment is now going to improve a lot because the sanctions against Russia are very likely to be lifted. It could be as early as March. As we know, the relationship between Russia and the United States is going to be much better with Trump than it would have been with Hillary Clinton.
Wall: And Russia experienced quite a rally in 2016, but you think there even is going to be more to gain from here.
Hovasse: On a few fronts. maybe not on the fixed income assets, but the currency and the equity markets still have legs.
Wall: And then turning to India, to mix it up a bit, this is a country which you said was perhaps less sensitive to what is going on in the White House and remains your
Hovasse: Yes, because India's economic growth relies more on domestic demand, and I think Modi is doing a great job. He is pushing reforms. He had a very spectacular reform on November the 8th; he announced the discontinuation of bank notes of 500 and of 1,000 rupees, which accounted for 86% of the total bank notes in circulation, and this is going to reduce the part of the informal economy. It's going to support the banks, because all those bank notes have been put into the banking system. The banks are going to be much more solid because the deposit base is growing and they are going to be able to finance the credit demand for the future.
Wall: A short-term shock with that sort of policy, though, for a long-term gain?
Hovasse: Yes. It's a negative shock on growth for the short-term. Nobody knows how long that shock will be felt. But there are already signs – only two-and-a-half months after that, there are already signs that plenty of sectors have already normalized. We expect that it's probably going to be a one or two-quarter shock.
Wall: And of course, there's also VAT changes and
Hovasse: Exactly. This tax, the GST, this global sales tax, is going to be implemented in our opinion before the end of the summer, and that's a very important catalyst for Indian assets.
Wall: Xavier, thank you very much.
Hovasse: Thank you very much, Emma.
Wall: This is Emma Wall for Morningstar. Thank you for watching.
