Blackstone-Backed Hedge Fund That Beat Peers Likes Old-World EMs

(Bloomberg) --

Carrhae Capital, the Blackstone Group Inc.-backed hedge fund, is betting on old-world industries in emerging markets that will benefit from recovering demand amid continued monetary stimulus worldwide.

After a year in which tech stocks excelled, the prospect of a pick-up in growth augurs well for more traditional companies, even though additional fiscal stimulus under Joe Biden will likely lead to higher U.S. Treasury yields, said Ali Akay, the London-based chief investment officer of Carrhae. The manager’s top picks include energy companies such as Russia’s Gazprom PJSC and travel stocks including Turkey’s Tav Havalimanlari Holding AS.

“The prevailing U.S. dollar real-rate environment is undoubtedly very important for emerging-market assets,” Akay said. “However for equities, growth impulse and activity levels matter more.”

Carrhae Capital manages funds with two separate strategies. The long-only one gained more than 31%, after fees, in 2020, double the increase in MSCI Inc.’s gauge of developing-nation stocks. The long-short strategy returned a net 16.6% last year, according to the firm, compared with an average gain of about 12% among emerging-market peers. Long-short managers buy stocks they expect to rise and hedge those bets with sales of borrowed shares they hope to buy back at a cheaper price.

Growing debate about the Federal Reserve tapering its bond purchases is fueling market speculation that the U.S. yield curve is poised for further steepening. But provided the Fed controls or slows any increase in long-term rates, developing economies will benefit from increased demand for exports and higher commodity prices, Akay said.

Here’s where Carrhae, which oversees $679 million, is putting its money:

• Most old-world industries are trading in the middle of their historical range, with potential for positive earnings surprises, despite lofty emerging-market valuations
  • Likes MMC Norilsk Nickel PJSC, Russia’s largest miner
• South African tech investor Naspers Ltd. and Mumbai-based Reliance Industries Ltd.
• Dufry AG, which runs duty-free shops in countries including Mexico, Russia and the United Arab Emirates
• Chinese technology firms include JD.com Inc, Bilibili Inc. and NetEase
• Bought Alibaba Group Holding Ltd. shares after taking profit last year

To be sure, a significant and unexpected rise in inflation would constrain policy makers’ options, Akay said, adding that the path for reflation plays look clear for now.

“There is no sign of rebellion in the bond markets so I expect monetary stimulus to continue unabated,” he said. The Group of Seven countries’ debt burden also “serves as a hand-brake against a sudden shift in the monetary stance.”

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