Carmignac Portfolio EM Debt: Letter from the Fund Managers - Q2 2026

In the second quarter of 2026, Carmignac Portfolio EM Debt delivered a strong performance of +4.68% vs 4.41% for the reference indicator. Performance was primarily driven by our exposure to hard-currency emerging market debt, complemented by positive contributions from our allocation to selected emerging market currencies.

The second quarter of 2026 once again demonstrated how quickly market narratives can shift. Following a turbulent first quarter dominated by geopolitical tensions and inflation concerns, investor sentiment improved markedly as fears of a broader Middle East conflict faded. The interim agreement between the United States and Iran and the reopening of the Strait of Hormuz triggered the largest decline in Brent crude prices since early 2020. Lower energy prices prompted a reassessment of inflation risks, supporting global fixed income markets and shifting investors' focus back to resilient economic fundamentals.

Against this backdrop, central banks maintained a cautious stance. At its first meeting under Kevin Warsh, the Federal Reserve (Fed) adopted a more hawkish tone, emphasizing the resilience of the US economy and signaling that interest rates may remain restrictive for longer. Market expectations consequently shifted from modest rate cuts at the start of the quarter to nearly 40 basis points of additional tightening by quarter-end. While easing inflation expectations supported European government bonds, stronger US data pushed Treasury yields higher, reinforcing the divergence across developed bond markets.

The improvement in risk sentiment provided a supportive backdrop for emerging market debt. Hard-currency sovereign debt was the strongest-performing segment, benefiting from broad credit spread compression, with high-yield issuers outperforming investment-grade names and Latin America alongside CEEMEA leading regional returns. The EMBI Global Diversified index tightened by 37 basis points over the quarter.

Local currency debt also posted positive returns, supported by lower oil prices, easing inflation concerns and attractive real yields. Performance was strongest in CEEMEA and Latin America, where declining yields and stronger currencies boosted returns, while Asian markets recovered towards quarter-end as lower energy prices improved the outlook for oil-importing economies.

Emerging market currencies also strengthened over the quarter as improving risk appetite and attractive carry attracted investors back into the asset class. CEEMEA and Latin American currencies led the rally, while Asian currencies recovered in June as geopolitical tensions eased and oil prices declined.

The Fund delivered a strong performance over the quarter, with hard-currency sovereign debt as the main contributor. Improving investor sentiment and tighter credit spreads drove strong returns across the asset class. Our high-conviction sovereign positions in Egypt, Côte d'Ivoire and Ukraine were among the strongest contributors, while selected Latin American issuers also benefited from the outperformance of high-yield sovereign debt.

Currencies were the Fund's second-largest performance driver as improving risk sentiment, attractive carry and lower oil prices supported emerging market currencies. Performance was well diversified, with the Hungarian forint, Mexican peso and Egyptian pound among the strongest contributors, while the recovery in several Asian currencies during June provided an additional tailwind. These gains more than offset the negative impact of our limited US dollar exposure.

Local currency debt also contributed positively. Active duration management enabled the portfolio to benefit from improving local bond markets as inflation concerns eased. Hungary performed particularly well following the election of Peter Magyar, while Poland and South Africa also generated positive returns. Selected Latin American markets further supported performance as inflation pressures eased, improving macroeconomic conditions and strengthening the outlook for local rates.

The main detractor over the quarter came from our credit hedging strategies. As credit spreads continued to tighten, our CDS positions on both indices and selected sovereign issuers modestly weighed on performance. While these hedges reduced returns in a risk-on environment, they remain an important component of our portfolio construction and risk management framework.

Looking ahead, we remain constructive on emerging market debt following another quarter of solid performance. The asset class continues to benefit from resilient macroeconomic fundamentals, elevated real yields and a favourable monetary policy backdrop. Inflation remains well contained across most emerging economies, giving central banks greater flexibility to pause or ease monetary policy. Beyond the macro environment, the political backdrop has also become increasingly supportive, notably in Latin America. Recent election outcomes in Peru and Colombia point towards a more investor-friendly policy backdrop, while Argentina continues its remarkable adjustment, having exited the distressed debt category and posted record trade surpluses supported by strong energy exports. In Asia, structural developments also remain supportive. India has opened its bond market to foreign investors, triggering record capital inflows, while Indonesia has announced further reforms that should strengthen the country's long-term investment appeal. We therefore continue to favour an active and selective approach across hard-currency debt, local rates and currencies.

As our conviction strengthened during the quarter, we increased the portfolio's duration from around 330 basis points at the beginning of April to approximately 660 basis points by the end of June, primarily through a higher allocation to local currency debt. Emerging market central banks tightened policy well ahead of their developed market peers and now have greater flexibility to pause or ease as inflation remains well behaved across most economies. Meanwhile, the sharp retracement in oil prices has reduced inflationary pressures while local bond yields remain elevated, leaving significant room for yield compression and reinforcing our constructive view on emerging market duration.

Within local debt, we increased exposure across Latin America, notably Mexico, Colombia and Brazil, while reinforcing positions in Central and Eastern Europe, particularly Poland, the Czech Republic and Hungary. We remain constructive on Hungary following the election victory of the pro-European Peter Magyar, as we believe markets continue to underestimate the potential for political and economic normalization. A more constructive relationship with the European Union could unlock significant EU funding, supporting further convergence of Hungarian bond yields towards euro area levels. More broadly, we continue to favour countries offering credible monetary policy frameworks, attractive real yields and further scope for bond market appreciation.

Hard-currency sovereign debt remains one of our highest conviction investment themes. We maintain core position in countries such as Côte d’Ivoire, Egypt and Romania while remaining focused on idiosyncratic opportunities offering attractive risk-adjusted returns.

We also strengthened our conviction in emerging market currencies throughout the quarter. We reinforced our positions in high-conviction Latin American currencies, including the Brazilian real, Colombian peso and Mexican peso, alongside selected Central and Eastern European currencies such as the Hungarian forint. As geopolitical tensions eased and oil prices declined, we increased exposure to several undervalued Asian currencies that had lagged during the conflict, notably the Indian rupee and Indonesian rupiah. Conversely, we gradually reduced our exposure to the US dollar and ended the quarter with no US dollar allocation, reflecting our constructive view on emerging market foreign exchange.

Finally, while our outlook remains constructive, we continue to pay close attention to the portfolio's overall risk profile. We therefore maintain credit hedging through CDS indices and selected sovereign issuers, while preserving our exposure to inflation-linked strategies in Mexico and Poland, as well as European breakevens, to counter against any renewed inflationary pressures.