Carmignac Portfolio EM Debt

The Federal Reserve delivered a more accommodating message than expected at its September meeting, cutting its key rate by -0.5%.

Growth data nevertheless exceeded expectations across the Atlantic, both in terms of unemployment, which declined to 4.2%, and consumer resilience, with retail sales accelerating by +0.1%.

The Indonesian and South African central banks followed the Federal Reserve's lead, announcing rate cuts of 25 basis points, while the Brazilian central bank raised its key rate by 25 basis points.

The US dollar's weakness benefited emerging currencies, which appreciated over the month, notably Latin American and Asian currencies.

At the end of the period, the Chinese authorities announced a series of measures aimed at countering China’s economic slowdown and boosting market sentiment.

The Fund ended the month with a positive absolute performance, but underperformed its reference indicator.

Against a backdrop of monetary easing and the good performance of risky assets, our investments in local and external EM debt both contributed positively to portfolio performance.

In local debt, our positions in Mexican local rates made a positive contribution, as well as our exposure to South African and Indonesian rates.

On the credit side, our investments in emerging countries' external debt made a positive contribution, benefiting from our allocation to Mexican quasi-sovereign issuer Pemex, and our positions in Egyptian and Argentine debt. On the other hand, our credit market hedges weighed slightly on performance.

Finally, on the currency front, we benefited from our exposure to Latin American currencies (Brazilian real, Chilean peso) and Asian currencies (Malaysian ringgit). On the other hand, we suffered from our short positions in the Chinese yuan, which we reduced over the period.

Against this backdrop of a soft landing for the economies and inflation continuing its gradual decline, we are maintaining a relatively high level of modified duration, at around 6 at the end of the period.

Over the period, we increased portfolio's modified duration to emerging local debt, by strengthening our positions in Brazilian local rates, as the markets are still anticipating a large number of rate hikes, which we believe to be exaggerated.

We have also strengthened our positions in Indonesian local debt, where the fundamentals remain very favorable, with falling inflation, healthy growth and a low fiscal deficit.

On the external debt side, we continue to favor special situations in countries where economies are undergoing significant restructuring or improvement, such as Egypt and Romania. Over the month, we reduced our positions in external high-yield bonds on a profit-taking, after their good performance in previous weeks.

On credit, we are maintaining our cautious bias due to high valuations, and are maintaining a substantial level of hedging on Itraxx Xover to protect the portfolio from the risk of widening credit spreads.

Finally, we maintain a selective exposure to emerging currencies, with a preference for Latin American currencies and those linked to commodities, which should benefit from the Chinese stimulus. These include the Brazilian real, Chilean peso, Indonesian rupiah and South African rand.