Carmignac Portfolio EM Debt: Letter from the Fund Manager - Q1 2026

In the first quarter of 2026, Carmignac Portfolio EM Debt delivered a net performance of -0.76%, outperforming its benchmark, which declined by -1.07%. This relative outperformance was primarily driven by the positive contribution of our currency allocation, hedging strategies and the resilience of our local debt positions.

The first quarter of 2026 was marked by a sharp deterioration in the geopolitical environment, driving a significant shift in global market dynamics. The period began in a relatively constructive but fragile context, with rising political tensions weighing on sentiment. Key developments included renewed U.S. pressure on its allies regarding Greenland, the arrest of Venezuelan President Nicolás Maduro, and escalating tensions with Iran amid stalled nuclear negotiations. At the same time, uncertainty surrounding U.S. trade policy, following the introduction of a 10% global tariff, and concerns over the impact of artificial intelligence on employment contributed to a more cautious tone across markets.

January and February were characterized by intermittent risk-off episodes, which supported sovereign bonds. U.S. Treasury yields declined over February, with the 10-year falling by around 29 basis points to below 4%, reflecting safe-haven demand. Meanwhile, resilient U.S. growth and persistent inflation led the Federal Reserve to maintain a cautious stance, pushing back against expectations of near-term rate cuts. This combination of stable rates and a softer U.S. dollar proved supportive for emerging market assets, particularly local debt and FX, while commodity exporters benefited from stronger energy and metals prices.

March marked a clear turning point. The escalation of conflict in the Middle East following U.S.-Israel strikes on Iran triggered a significant energy shock, with oil prices rising above $110 per barrel amid disruptions to the Strait of Hormuz. This led to a sharp reassessment of inflation and monetary policy expectations. U.S. yields moved higher, with the 2-year rising by around 42 basis points and the 10-year by 28 basis points, reaching approximately 4.30% at quarter-end, alongside a broad increase in risk aversion and credit spread widening.

For emerging markets, the quarter was characterized by two distinct phases. The first two months provided a supportive backdrop, as the year began in a global easing environment, with both developed and emerging central banks engaged in, or expected to pursue, monetary easing cycles. This was driven by moderating inflation and still-resilient growth, creating favourable conditions for risky assets. In this context, emerging markets benefited from attractive carry, a weaker U.S. dollar and resilient domestic fundamentals. Hard-currency sovereign bonds extended their positive momentum, while local currency debt benefited from yield compression and currency appreciation, before these gains were largely offset by the March correction.

As the geopolitical environment deteriorated with the escalation of the conflict in the Middle East, risk sentiment weakened across global markets and asset classes, including emerging markets. Emerging debt came under pressure, with hard-currency bonds recording their weakest monthly performance in several years, impacted by rising U.S. yields and wider spreads. Local markets also weakened, with foreign exchange accounting for a significant share of the drawdown. However, higher energy prices supported several commodity-linked currencies, particularly in Latin America and Kazakhstan, while the Chinese renminbi showed relative resilience.

The global shock also triggered a repricing of monetary expectations across emerging markets, shifting away from easing towards a more cautious stance or even renewed tightening in some cases. This adjustment appears somewhat aggressive given that real interest rates remain at historically elevated levels compared to the past two decades, while inflation remains contained and in some cases below central bank targets. More fundamentally, emerging markets entered this period in a stronger position than in previous shocks, with contained inflation, improved external balances and more credible monetary frameworks, helping ensure a more orderly adjustment.

During the first quarter of 2026, the Fund delivered a negative absolute performance but outperformed its reference indicator, supported by its active allocation and defensive positioning in a more challenging market environment.

Hard-currency sovereign debt was the main detractor over the period. The widening in external spreads, with the J.P. Morgan EMBI Global Diversified index increasing by around 35 basis points to close near 290 basis points, weighed on performance, especially during the sharp risk-off episode in March. In this context, our exposures to high-yield issuers such as Egypt and Turkey detracted, as these markets proved particularly sensitive to the deterioration in global risk sentiment. Our positioning in South Africa also negatively impacted performance, especially in March, as the country was affected by rising oil prices given its status as a net oil importer.

In local-currency debt, performance was initially supported by our long duration positioning in high real rate environments during the first two months of the year. However, these gains were more than offset by the sharp repricing rates in March, resulting in a negative contribution over the quarter. Our long positions in local rates, including South Africa, Mexico and Peru, were the main detractors as yields moved higher. Conversely, our exposures to Central and Eastern European markets, such as Poland and Hungary, made a modest positive contribution. In addition, our underexposure to Asian local markets, including India, Thailand and Indonesia, allowed us to outperform on a relative basis.

Currency allocation was the main positive contributor over the quarter. The Fund benefited from its exposure to commodity-linked and high carry currencies, which we have reinforced during March, particularly in Latin America, including the Brazilian real, the Colombian peso and the Mexican peso, as well as the Kazakh tenge, in a context of rising energy prices supporting exporting countries. Performance was further supported by our exposure to the Chinese renminbi, which outperformed and remained less sensitive to global risk sentiment, benefiting from its managed currency framework.

Finally, the portfolio benefited from its defensive positioning. In a context of market sell-off, widening credit spreads and renewed inflationary pressures, our credit protection strategies implemented via credit default swaps (CDS) and inflation positioning, notably through inflation-linked bonds (Mexico, Brazil, Poland) and European breakevens, contributed positively and helped mitigate the impact of the broader market correction.

Going forward, while geopolitical developments may continue to generate short-term volatility, our medium- to long-term investment thesis on emerging market debt remains unchanged. Emerging economies today benefit from stronger fundamentals, more credible central banks and healthier external balances than in previous cycles, providing a solid foundation to navigate the current environment. We therefore remain constructive on emerging market debt, supported by resilient fundamentals, still-attractive yields and improving external dynamics. While the recent geopolitical shock has led to a repricing of inflation and monetary policy expectations, we believe this adjustment has, in some cases, been excessive, creating renewed opportunities across the asset class.

Should the geopolitical situation further deteriorate and materially alter the global inflation or monetary policy outlook, we remain ready to adjust exposures accordingly. At this stage, however, we believe the current portfolio positioning appropriately balances risk management with the opportunities available in emerging markets.

Against this backdrop of escalating geopolitical tensions and the resulting energy shock, which has significantly impacted inflation dynamics and central bank policy expectations, we have reduced the portfolio’s overall risk by increasing selectivity and focusing on relative winners following the volatility observed in March. We have significantly lowered duration from around 640bps (as of 31/12/2025) to approximately 350bps (as of 31/03/2026), primarily through a reduction in local-currency duration. At the same time, the Fund’s yield to maturity has increased meaningfully to around 10.0% (including currency carry), reinforcing the attractiveness of the asset class.

On local-currency debt, we have actively managed our exposure and implemented relative value strategies by reducing positions in oil-importing countries in Central and Eastern Europe and in South Africa, which are more vulnerable to higher energy prices. At the same time, we have strengthened our positioning on commodity exporting countries of Latin America, notably in Brazil, Colombia and Peru, and initiated a tactical position in Romania.

In hard-currency sovereign debt, we maintain a broadly stable allocation, focusing on idiosyncratic opportunities and our core high-conviction positions such as Côte d’Ivoire and Egypt, while selectively increasing exposure to countries offering attractive risk-return profiles, including Romania and Ecuador. In the latter, improving macroeconomic discipline, strengthening fundamentals and ongoing reform momentum continue to create compelling opportunities underappreciated by markets despite lingering risks.

While our exposure to corporate credit remains limited, we continue to be selectively invested in high-yield issuers rated BB- to B, offering attractive carry, particularly in the energy and financial sectors.

On currencies, we have increased our exposure to the U.S. dollar following the outbreak of the conflict, while maintaining a decent exposure to the euro. We continue to favour commodity-linked currencies and have reinforced our positions in several of them, notably the Brazilian real, Mexican peso and Kazakh tenge, which benefit from the current energy environment. We have also increased exposure to selected Eastern European currencies, including the Hungarian forint. In addition, we have built a position in the Chinese renminbi over the period, which remains less sensitive to global risk sentiment due to its managed framework. Conversely, we maintained short positions on several Asian currencies, particularly in oil-importing countries, before gradually taking profits towards the end of the period.

Finally, we have strengthened the defensive positioning of the portfolio to navigate a more volatile environment. Credit protection strategies, implemented through CDS on indices and selected issuers, have been increased to hedge against further spread widening. At the same time, we maintain meaningful exposure to inflation-linked instruments in selected markets (Mexico, Poland, Brazil), as well as to European breakevens, providing protection against a potential resurgence in inflation.