Leaders League: How would you assess the current state of the world’s emerging markets?
Michel Audeban: It’s complicated. Following the onset of the war in Ukraine, some clients hit the panic button and decided to lump all emerging markets together in the ‘risky’ category, pointing to the democratic deficit in Russia and China, markets now shunned by investors. The weight of investors in this asset class is 6%, the lowest level since records began (against 12% for the MSCI Emerging Markets Index).

What is the current picture in China?
In China, we are two years into a period of state intervention, which began with the cancelling of the Ant Group IPO, and was followed by reforms to the education system and the Zero Covid policy. The Communist Party congress, currently underway in Beijing, should provide some key pointers for investors.

What announcements are you expecting from the congress?
We don’t foresee there being any major developments. The most likely outcome will be that Xi Jinping stays in power for a third term, as he is seeking, which would, nevertheless, be exceptional [No Chinese leader since Mao has served more than two terms].

That said, it is possible that the current difficult investment landscape in China could change, if the Communist Party decides to take a more pragmatic approach from now on. The rate of covid vaccinations is constantly increasing, and news of the arrival of two new mRNA vaccines in the country, coupled with the recent mood music coming out of Beijing, leads us to be cautiously optimistic about a relaxation of China’s Zero Covid policy.

We like investing countries whose economies are growing, because it is easier to pay back debt when growth is positive

Hong Kong, something of a testing ground for new measures, recently saw its lockdown lifted. This sent a very strong signal to the markets and, if the month-long period of observation goes well, China could, at least unofficially, relax its Zero Covid policy, which would lead to an uptick in consumer activity.

How are the markets adapting?
We should not lose sight of the fact that, economically speaking, China is not a Communist country. Now, it is certainly not a democracy, in terms of individual freedoms or how it holds elections, yet economically, the country is entirely liberal, far more so, in fact, than France. To us, the worst of the economic bad news concerning China is behind us and has already been factored into the plans of asset managers. Besides, the bleakest projections do not always come to pass, which leaves room for optimism.

How are things looking in India, from an investment perspective?
The country is currently enjoying the strongest levels of growth of any country – developed or developing – at 7%, despite having had a bumpy ride during the pandemic. The main problem for asset managers active in India is the high price of shares. A recent trend has seen international investment in the region flee China for India, but we wouldn’t rule out a reversal of this trend in the coming months.

Turning to the Brazilian presidential election, which outcomes pose a threat to international investors?
The current elections do not bode well for the local economy. The relative good news is that Lula topped the poll in the first round of voting. But even if he wins, he could find himself with a majority right-wing senate, something that would see the government operating with a diminished level of power.

A very real danger exists, unfortunately, of a scenario where Lula wins the election, but Bolsonaro refuses to accept the outcome, which would lead to a constitutional crisis. Another big question will be the identity of the new finance minister.

What impact are the current decades-high levels of inflation having on emerging markets?
Brazil raised its key interest rate nine months ahead of the Fed, which proved to be the right approach, since inflation has been on the decline in Brazil for the past month and a half. In fact, to a lesser degree, inflation has been decreasing across all developing nations.

In real terms, developing nations are in the positive, while in Europe we sit at -5%, which puts us horribly behind. In the current inflationary crisis, it is the developed nations who are at the bottom of the class. All of which makes emerging countries a more attractive prospect for investment at the moment.

You recently launched the GemBond, a global emerging debt fund. Could you tell us more about it?
We like investing countries whose economies are growing, and we like to do so via bonds, because it is easier to pay back debt when growth is positive. In addition, taken as a whole, the level of debt (on average and related to GDP) of emerging nations sits at 60%, which is around two times less than for developed nations. From a tactical point of view, these countries are in a better position in terms of inflation and risks.    

Lastly, GemBond is dollar-denominated sovereign fund, so in relation to the euro debt level of 0.46% this means that a 20% allocation to this fund, reduces the risk in your overall bond portfolio.