Carmignac Portfolio EM Debt: Letter from the Fund Managers - Q3 2026

In the third quarter of 2026, Carmignac Portfolio EM Debt posted a negative performance of -2.00%, compared with -2.30% for its reference indicator, bringing year-to-date performance to +1.99% versus +0.92%. Performance was primarily impacted by our exposure to local currency debt, while our currency positioning and prudent duration and credit management helped cushion losses and supported the Fund’s relative outperformance.

The third quarter of 2026 marked a sharp reversal from the more supportive backdrop seen at the end of the previous quarter. Renewed geopolitical tensions in the Middle East and further disruptions to energy supply pushed oil and European gas prices sharply higher, reviving inflation concerns at a time when global economic activity remained resilient. In the United States, headline inflation reached 3.4% in August, while euro area inflation accelerated to 3.8% in September, reinforcing concerns that the energy shock could translate into more persistent price pressures.

Against this backdrop, monetary policy expectations were repriced significantly. Both the Federal Reserve (Fed) and the European Central Bank (ECB) raised policy rates by 25 basis points in September, with the Fed lifting its target range to 3.75–4.00% and the ECB its deposit rate to 2.50%. This increasingly hawkish policy backdrop triggered a broad sell-off across developed sovereign bond markets. Over the quarter, US 2-year and 10-year yields rose by 71 and 82 basis points respectively, while their German counterparts increased by 66 and 74 basis points. Renewed fiscal concerns in Europe added to the pressure on rates and broader risk sentiment.

Emerging market hard-currency debt was not immune to the global rates shock. The asset class remained relatively resilient during much of the quarter, supported by solid fundamentals and attractive carry, before coming under greater pressure towards the end of September as higher core yields were compounded by wider credit spreads. Latin America was the weakest-performing region over the period, as the broader deterioration in risk sentiment coincided with less supportive country-specific developments across several sovereign issuers. High-yield debt nevertheless proved relatively more resilient than investment grade over the quarter, partly reflecting its lower sensitivity to the sharp rise in developed-market yields.

Local currency debt also posted negative returns as the rise in global bond yields spilled over into emerging markets. European emerging markets were particularly affected, reflecting their greater sensitivity to higher oil and gas prices as net energy importers, which renewed inflation concerns and pushed local yields higher. The region significantly underperformed Asia and Latin America, where local markets proved more resilient. Higher energy prices and a stronger US dollar towards the end of the quarter also weighed on returns across several local markets.

Emerging market currencies posted more divergent performances. Asian currencies generally proved resilient, with the South Korean won standing out as the strongest performer, supported by exceptionally strong semiconductor exports, a widening trade surplus and continued demand linked to the global AI investment cycle. The Colombian peso also delivered strong gains, while several Central and Eastern European currencies weakened as higher energy prices deteriorated the regional inflation outlook. Overall, currency performance provided a more mixed but relatively resilient picture compared with the pronounced weakness in global and local bond markets.

The Fund posted a negative return over the quarter amid a sharp sell-off in developed market rates and a significant repricing of monetary policy expectations, which spilled over into emerging markets. Nevertheless, our prudent duration stance, cautious credit exposure and selective currency positioning helped cushion the impact, enabling the Fund to outperform its reference indicator.

Local currency debt was the main detractor. Renewed geopolitical tensions and higher energy prices triggered a broad rise in global yields, weighing on emerging market rates. Our long positions in EMEA were particularly affected, notably in South Africa, Poland, the Czech Republic and Hungary. As net importers of oil and gas, these economies were particularly vulnerable to higher energy prices, which exacerbated inflation concerns and put upward pressure on local yields. These losses were partly offset by our long positions in Kazakh and Brazilian rates, as well as short positions in US Treasuries and German Bunds.

Hard-currency sovereign debt also made a modest negative contribution. After remaining resilient for most of the quarter, credit spreads widened towards the end of September as renewed fiscal concerns in developed markets, particularly Europe, weighed on global risk sentiment. Our positions in Argentina, Ecuador and Ukraine were among the main detractors.

Currencies were the strongest contributor to performance and helped meaningfully offset losses elsewhere in the portfolio. Our currency allocation benefited from exposure to selected Asian currencies. The Kazakh tenge performed well, supported by Kazakhstan’s position as a major oil and gas exporter, higher energy prices and attractive carry. The South Korean won and Taiwan dollar also contributed positively, supported by continued strength in the technology cycle and sustained investment related to artificial intelligence and semiconductor demand. Our exposure to the Chinese renminbi provided an additional source of diversification, reflecting its relatively lower sensitivity to broader global risk factors over the period. Outside Asia, positions in the Colombian peso and Nigerian naira also generated positive returns.

Finally, our credit hedges contributed modestly as spreads widened towards quarter-end. CDS protection on US high-yield and South African risk helped mitigate the deterioration in global risk sentiment, providing useful downside protection during the period.

Despite renewed geopolitical tensions in the Middle East and the broader rise in global bond yields, emerging market debt has remained relatively resilient. While emerging markets have been sought primarily for their superior growth potential, they now also benefit from a stronger policy mix, with better-contained inflation, improved fiscal and external balances, larger foreign-exchange reserves, lower leverage and elevated real yields. Against this backdrop, hard-currency EM sovereign debt, particularly the high-yield segment, continues to offer attractive carry and relatively contained volatility. Local currency debt has faced greater pressure from the global rates shock, but its underlying technical backdrop and valuations remain supportive. Inflation continues to surprise on the downside across many emerging economies and real yields remain elevated. We believe this disconnect continues to create selective opportunities.

The political backdrop has also become increasingly supportive, particularly in Latin America, where a broader shift towards more market-friendly policies is taking shape. This trend could be reinforced in Brazil, where a more fiscally orthodox outcome in the upcoming elections would provide an additional catalyst for Brazilian assets.

As the global rates shock intensified during the quarter, alongside renewed geopolitical tensions and higher commodity prices, we adopted a more cautious approach to duration. The Fund's modified duration was gradually reduced from 6.6 at the end of June to 2.5 at the end of September, primarily through lower exposure to local currency debt and increased short positions in US Treasuries and German Bunds. This positioning should provide greater protection against further upward pressure on developed-market yields while preserving exposure to selected opportunities across emerging markets.

Hard-currency sovereign debt remains our highest-conviction allocation, supported by attractive carry and a relatively contained default outlook. While investment-grade spreads remain tight, we continue to see compelling opportunities in high yield and special situations, notably in Côte d’Ivoire, Argentina and Egypt.

Within local debt, we reduced our overall exposure, particularly in markets more vulnerable to higher energy prices, including South Africa and Hungary, while also trimming our Mexican rates exposure. We added a short position in 10-year Polish rates amid increasing fiscal risks. Nevertheless, we continue to identify attractive opportunities where valuations and domestic dynamics are supportive. We maintain exposure to the Czech Republic and especially in Brazil, where a potential shift towards greater fiscal orthodoxy could support local assets, while adding selected positions in South Korea and Kazakhstan, where we see favorable country-specific catalysts and attractive valuations.

We remain constructive on emerging market currencies versus the US dollar, supported by attractive carry, valuations and solid fundamentals. We maintain exposure to commodity-linked currencies such as the Kazakh tenge and remain positive on the Mexican peso, supported by contained inflation, a strong trade balance and growing electronics exports linked to the AI investment cycle. We also favour the Chinese renminbi given its attractive valuation, lower sensitivity to global risk factors and potential for gradual appreciation. More broadly, the portfolio retains diversified exposure to selected emerging market currencies offering attractive carry and sound external fundamentals.

Finally, while our medium-term outlook remains constructive, we continue to manage the portfolio's overall risk profile carefully. We maintain credit protection through high-yield CDS indices and selected sovereign CDS, complementing our duration hedges and providing protection against a potential further deterioration in global risk sentiment.