Carmignac Absolute Return Europe: Letter from the Fund Managers - Q4 2025

Over the last quarter of 2025, Carmignac Absolute Return Europe (A EUR Acc share class) realized a positive performance of +2.3%.

European equities ended the year on a strong note, materially outperforming U.S. markets in the fourth quarter. This relative performance was supported by a tangible improvement in macroeconomic confidence: euro area inflation continued to converge toward the ECB’s 2% target, policy uncertainty eased, and the third-quarter earnings season proved resilient. Crucially, market leadership broadened beyond a narrow cohort of stocks, pointing to healthier and more sustainable equity market dynamics.

That said, economic momentum remained uneven. Services activity continued to demonstrate resilience, while manufacturing stayed subdued outside structurally supported segments such as defence and energy security, reflecting weak global demand and limited order visibility.

At the sector level, Basic Resources led performance, followed by another robust quarter for banks, driven by solid earnings delivery and ongoing capital returns. Utilities also posted strong gains, while Healthcare staged a convincing rebound after a period of underperformance as sentiment and news flow improved. Conversely, Media, Chemicals, Technology, Industrials, and Real Estate lagged the broader market.

Against this backdrop, the portfolio delivered a positive end to the year. Performance in the final quarter was driven primarily by Financials, Healthcare, Industrials, Technology, and Materials, with the majority of sectors contributing positively. Modest losses were confined to Consumer Staples, Consumer Discretionary, and Utilities, reflecting disciplined risk management and active portfolio construction.

During the quarter, we increased exposure to Financials, which remains our highest-conviction allocation. We believe banks continue to offer attractive earnings growth at compelling valuations, supported by strong capital generation, rising dividends, and ongoing share buybacks. Exposure was increased both through core positions and selective new investments. We also added to Healthcare following a meaningful derating, and to Industrials, where we see attractive niche opportunities underpinned by strong order visibility. Within Materials, exposure was increased to both industrial and precious metals, which delivered solid returns. These additions were funded by tactical reductions in Communications, Consumer Staples, and Consumer Discretionary, where the risk-reward profile had become less attractive.

Reflecting a more supportive investment environment, gross exposure was increased through much of the quarter into the high-120% range, before being tactically reduced toward year-end to reassess opportunities. Improving earnings momentum following the third-quarter reporting season allowed net exposure to rise into the high-20% range.

On a stock level, the main contributors were:

On a stock level, the main detractors were:

Looking into Q1 2026, we remain constructively positioned but selective. In Europe, growth is stabilising rather than accelerating, supported by resilient domestic demand, easing inflation, and a gradual shift toward more supportive fiscal policy, most notably in Germany. Euro area growth is expected to remain modest, around 1–1.5%, but this should be sufficient to underpin earnings stability and generate selective upside. Monetary easing initiated by the ECB in 2025 should increasingly feed through in 2026, while European equity valuations are expected to remain compelling relative to the U.S.

Beyond Germany, we see particularly attractive upside potential in Sweden. PMIs are firmly in expansionary territory, fiscal policy is turning more supportive, interest rates are declining, and the high proportion of variable-rate mortgages provides a powerful transmission mechanism to household demand. With an election year approaching, we see scope for positive growth and earnings surprises, reinforcing our decision to build selective Nordic exposure.

Overall, the European equity outlook supports cautious optimism. Earnings expectations for 2026 have improved to mid-single-digit growth. While this does not point to a strong cyclical upswing, it reinforces the case for active stock selection. We continue to favour banks, cyclicals, and industrials benefiting from fiscal spending, while tactically positioning for mean reversion in parts of the autos sector following a prolonged period of weakness.

In the U.S., the outlook remains fundamentally earnings-driven but increasingly constrained by valuations. AI-led growth continues to dominate market performance; however, elevated multiples leave equities more sensitive to shifts in interest rate expectations and policy uncertainty. As a result, we are broadening exposure away from concentrated technology risk toward more cyclically exposed industrial and consumer names where valuations are more supportive.

Q1 2026 is therefore likely to be shaped by the balance between maintaining exposure to proven winners and selectively exploiting opportunities among 2025 laggards, where we believe valuation dislocations offer attractive risk-reward. While banks remain our highest-conviction allocation, we are actively managing exposure following strong performance and ahead of potentially more cautious management guidance. Active positioning, disciplined risk management, and a continued focus on earnings delivery remain central to our investment approach.