In an environment marked by persistent geopolitical tensions and energy shocks, emerging markets continue to offer differentiated investment opportunities. Between sovereign debt, corporate credit, and equities, strategies vary according to local economic dynamics. With Patricia Kaveh, Director of Development at IVO Capital, and Kevin Thozet, Portfolio Advisor and Investment Committee member at Carmignac.
How do you address the emerging world at Carmignac? Kevin Thozet: The emerging world is quite vast and disparate. We have been working in these markets at Carmignac for about thirty years, primarily through equity markets but also through credit markets, foreign exchange markets, and sovereign debt markets.
IVO’s specialty is emerging corporate debt through the lens of the sovereign ceiling. What exactly does that mean? Patricia Kaveh: Yes, exactly. We have been involved in emerging market debt for over 20 years. Since 2012, at IVO Capital, it’s an asset class we know very well. We have observed its growth, with over 1,600 issuers in over 50 countries. The sovereign ceiling is an inefficiency in the market that we like to exploit at IVO. Companies are rated by rating agencies. It often happens that a good company will have a good rating from the agency, but that rating will be capped by the rating of its sovereign country of origin. So, in certain areas, for example, in Latin America, we end up with good quality companies that are restricted by their sovereign ratings, for instance in Ecuador. Therefore, we often say that we invest in good companies in bad countries.
Which countries are you focusing on? Kevin Thozet: Today, we prefer to invest in local currency sovereign debt. We also like foreign exchange markets. We have noticed a couple of things. Firstly, there has been a conformity with regard to emerging market debt instruments which behaved in a similar way, despite the diversity within the emerging universe. For example, how a rise in commodity prices will impact India or Brazil is quite different. India is a net importer of commodities, while Brazil represents nearly 5% of global oil exports. Secondly, we are used to having sovereign assets in bond markets from well-rated countries that perform well. However, the problem arises when there is a supply shock rather than a demand shock, leading to an increase in prices and inflation, which affects the bond instrument negatively. An interesting observation was the resilience of Chinese debt during this period.
While tensions rose in European debt, Chinese debt remained stable. Why is that? Kevin Thozet: Because it is much less exposed. It may be too early to draw significant conclusions from this situation. However, China is possibly benefitting relatively from what is happening. Everyone is losing, but China may be relatively winning. Why? Because it is much less exposed to energy shocks. It has already begun its transition and may need to gain market share from other major exporting economies.
How are you currently investing in your flagship strategy, IVO Emerging Markets Corporate Debt? Patricia Kaveh: Indeed. This fund has over 10 years of track record with 1.3 billion in assets under management. Since last year, we have had a defensive positioning with short duration and high carry. We are heavily invested in infrastructure and utilities financing. In the emerging market, the needs amount to 90 trillion in the coming years, according to some studies. We find many of these ideas on international markets, which is our focus, particularly in project bonds like Sahel in India, involving renewable energy with secure cash flows.
Is oil also a strong bet? Patricia Kaveh: The conflict in the Strait of Hormuz will create winners and losers. We have a relatively low exposure to gas in the Middle East and have favored Africa and Latin America, particularly Brazil, which will benefit from the shifting geopolitical landscape.
What are your convictions within Carmignac Emerging Markets? Kevin Thozet: In a fund like Carmignac Emerging Markets, we seek to capture companies exposed to the sixth wave of industrial innovation, artificial intelligence. We invest in companies involved in this value chain that are extremely globalized. Companies like META, OpenAI, and NVIDIA are examples. For instance, NVIDIA relies on companies in the emerging world to develop graphics cards. We look at TSMC in Taiwan and memory sector companies in South Korea. Additionally, in Latin America, there are many companies benefiting from underpenetration, similar to India. Investing in the banking or insurance sector allows exposure to the growth in these countries and the increasing number of financial intermediaries with the economic development on-site.
Lastly, you have a fund with a maturity in 2032. What are you investing in and what is the return? Patricia Kaveh: The Ormuz conflict has created opportunities and a slight increase in yields. This was the opportunity for us to launch IVO 2032, with a yield of over 9% in dollars and 7.1% in euros.
