Pickard (pictured), manager of the five crown-rated Carmignac Emergents fund, says the leading Asian economy cannot keep pace with its previous levels of growth and that this will be detrimental to the rest of the region.
"The market underestimates how much China is going to slow down and I don’t understand that because it should be obvious," he said. "One of the key things facing emerging markets investors is getting China right. There’s been a lot of underperformance recently and there’s still more to come."
"There has been a massive credit build-up [in China] which hasn’t been transferred to GDP growth."
"The market is still thinking China can grow at 8 per cent per year for the next 20 years, which I think is just not possible."
"To me it seems very obvious that China will continue to slow. Credit will have to slow in China, which will lead to slower GDP growth."
"It’s not a crisis but it would lead to a situation where you just get slower and slower growth in China."
"I’m not sure quite how prepared the market is for that," he added.
The Chinese slowdown has already translated in to poor stock market returns over the last three years or so. Our data shows the MSCI China index is up just 2.6 per cent over the period, compared with gains of 36.51 per cent from the MSCI AC World index.
Performance of indices over 3yrs
Source: FE Analytics
The FE Alpha Manager says there is an obvious need for reform in the country, and that the current leader, Li Keqiang, is making strong efforts to effect that change.
"It’s a shame he wasn’t around five years ago," the manager said.
Pickard raised concerns before a government meeting in October this year, due to the unrealistic expectations of what it would achieve.
In addition to the Chinese economic slowdown, Pickard says another worry is the amount of money rushing into "obvious" emerging markets such as Mexico, Turkey and south-east Asia.
While the manager says each of these countries has a strong case for investment, emerging markets investors need to be careful not to ignore the slowing BRICS, which still have solid companies with good growth potential.
"I’m more worried there has been a flood of liquidity [in emerging markets], particularly into the bond space. Emerging market debt is a good story compared to Europe, the US and Japan," he said.
"People are going there because they are looking for yield. We’ve seen big sell-offs in emerging markets currency after a period where they had been very stable."
He points out that currencies in Peru and Thailand have been on a continual upward rise.
"Suddenly, these currencies are taking a big hit," he said. "There’s a lot of uncertainty out there at the moment."
Pickard says that because of all the uncertainty, he is keeping a well-diversified portfolio, which includes significant exposure to quality Chinese companies.
There are four key qualities the manager looks for before investing in emerging markets companies, the first being high standards of corporate governance.
Pickard avoids companies that will be impacted by government controls or interests, opting for privately owned business models instead.
"Two per cent of our portfolio is state-owned. The benchmark is about 30 per cent," he said.
The second and third components are a strong cash-flow and an attractive growth profile.
The last is a good valuation, though he insists he is not a value investor.
"It is worth paying up a bit for quality. This is not a market where you want to be hunting around for value," he said.
One difference between the Carmignac Emergents fund and many of its peers is that it doesn’t hold Taiwan Semiconductor Manufacturing – a staple in the First State and Aberdeen funds, for example – in his top-10 holdings.
"We’re a bit worried about how much capex the company is having to spend," he explained. "The reason it’s not bigger is that in order to continually produce those smaller, more powerful chips, they have to invest an awful lot of capex."
However, Pickard says the firm is still in a strong competitive position and he is backing the giant company in his top-25 holdings.
The manager adds that he is still bullish on the consumer story in Asia, but warns investors to be careful not to pay too much for these types of firms.
"We still like consumer staples companies, but you need to be careful. Rather like markets, these companies have done very well and a lot of consumer staples have become very expensive," he said.
He adds that strong brands can often be limited for an emerging markets investor because many major ones, such as Unilever, come from Europe and the US and he cannot buy them in an emerging markets fund.
However, he owns brands such as Taiwanese food manufacturer Want Want.
"If you invest in established brands in China and brands that consumers trust, you’re going to do well," he continued.
Pickard is also tipping South African food distributor ShopRite as a play on the growing consumer story in Africa.
"If we can buy the African consumer, we will, but with a big cap fund we are limited. If we have a situation where we can do it, we will do it."
The €2.2bn Carmignac Emergents fund has outperformed the MSCI Emerging Markets index since its launch in December 2010, although it has lost 3.37 per cent over the period.
The fund has been open in Europe since 1997, and has consistently beaten its benchmark since then. Our data shows that over the last three years, the fund is up 19.52 per cent, compared with 11.52 per cent from the index.
Performance of fund vs index over 3yrs
Source: FE Analytics
Pickard took a hit in the down markets of 2011, but protected capital better than his peers and the index. His fund performed broadly in line with the index in 2012, gaining 12.55 per cent while the index made 13.03 per cent, according to FE Analytics.
Carmignac Emergents requires a minimum investment of £1,000 and has an ongoing charges figure (OCF) of 1.12 per cent. It is available across a number of major platforms.
Pickard also co-manages the equity pocket of the recently launched Carmignac Emerging Patrimoine fund, which combines an allocation to fixed income along with equity exposure, giving investors good returns with a lower-volatility approach to emerging markets.
According to FE data, Carmignac Emerging Patrimoine has a maximum drawdown of 9.45 per cent since launch – around half as much as Aberdeen Emerging Markets over the same period.
This article was written in collaboration with and is sponsored by Carmignac Gestion.
