Carmignac Portfolio EM Debt

In July, we observed a significant development in the US job market, with a decrease in private sector hiring and an increase in the unemployment rate. Additionally, the CPI June data published in July surprised to the downside for both the headline and core inflation.

Moreover, we believe that the global economy is experiencing a slowdown trend, driven by China's weak domestic economy and Europe's struggling manufacturing sector, although the services sector is holding up relatively well.

Hence, interest rate strategies performed remarkably well during the month, with the US Treasury yield decreasing by approximately 50 basis points during the month, while the German bund yield decreased by 40 basis points.

On the front of emerging markets, the month proved to be positive for both local and hard currency debt. This positive movement was primarily driven by a more dovish rhetoric from the Federal Reserve and the increasing likelihood of interest rate cuts in September.

In fact, when looking at emerging markets, external debt spreads slightly widened during the month, confirming that the positive performance was solely driven by rates.

On local rates, we saw significant downward moves in countries such as Hungary, Poland, Czech Republic, Mexico, Brazil, Colombia, etc., all following the US treasuries move.

In July, the market also factored in a 15 basis points interest rate hike by the Bank of Japan, resulting in a significant appreciation of the Japanese Yen. This move also benefited some Asian currencies. Lastly, during the month, the US Dollar experienced a slight decline against the Euro, despite an upward move in the final 10 days.

The Fund realised a strong positive performance during the month, slightly below the benchmark. Both local rates and external debt contributed positively.

On local rates, our long positions in Mexican, Polish, and Czech rates were successful.

Furthermore, our long positions in idiosyncratic stories and frontier countries such as Ecuador and Pemex proved to be fruitful in terms of external debt. However, our corporate credit investments remained neutral as the tightening of credit spreads was offset by our protections in this segment.

Currencies had a slight negative impact, with the USD losing ground against the Euro but our long positions in currencies like the Chilean Peso and Mexican Peso performing well.

In the current global slowdown, we have increased our duration to around 6 as of the end of the month.

Our allocation to local currency debt in countries with high real rates, declining inflation, and halted easing cycles has also been increased. These countries, such as Poland, Czech Republic, Mexico, Brazil, and South Africa, are sensitive to the monetary policies of the Fed and ECB and therefore should move forward with interest rate cuts.

We remain confident in the external debt space due to strong fundamentals and the increasing number of upgraded countries compared to downgrades (2.5 times more for the former). Inflation keeps decreasing, and fiscal adjustment plans are being implemented in many countries, with very few expected to contract.

While we exercise caution with currencies, we still favor certain Latin American currencies like the Brazilian real. High real rates and attractive valuations, along with a large trade surplus, make the Brasilian real an appealing choice. We have also added the Korean Won to our portfolio, which benefits from an expanding current account and the reversal of the Yen trade.