Carmignac Portfolio Emergents: Letter from the Fund Managers - Q3 2025

During the third quarter, Carmignac Portfolio Emergents F EUR Acc delivered a solid gain of +11.35%, outperforming its reference indicator, which rose by +10.53%. Since the beginning of the year, the Fund has advanced by +17.45%, compared with +12.39% for its benchmark, representing an outperformance of +5.1%.
As is typical of the strategy, performance was primarily driven by stock selection, with balanced contributions across both countries and sectors.

The first nine months of 2025 have marked the strongest three-quarter performance for emerging markets in fifteen years, with the index posting gains in every consecutive month so far this year. The MSCI EM Index closed the third quarter within 8% of its early-2021 market high. The pace of gains accelerated through September, supported by the US Federal Reserve’s long-awaited rate-cutting cycle. At the same time, the surge of investment linked to artificial intelligence continued to drive enthusiasm across Asia. North Asian technology markets — particularly South Korea, Taiwan, and parts of China — have led the gains, with Korea and Taiwan continuing to reach new all-time highs.

This strength in emerging markets coincided with a markedly weaker US dollar, as well as a temporary détente in US–China trade tensions during the period. Elsewhere, tariff headlines continued to abound, with many Asian countries securing agreements that were seen as manageable, and the resulting certainty was met with relief. India and Brazil, however, were each hit with 50% headline tariff rates on grounds that were more politically than economically motivated, making it clear that the White House is using tariffs as a tool to advance foreign policy goals and promote the US diplomatic agenda in ways that previously seemed unthinkable. These moves are largely symbolic — an opening gambit in negotiations — and therefore we do not see them as altering the attractiveness of these countries as investment destinations.

In China, most top-down indicators remained soft, yet industrial profit growth firmed up, ostensibly reflecting the early fruits of the government’s “anti-involution” policy aimed at curbing overcapacity. We remain unconvinced that this will drive meaningful change without a concurrent demand-side boost, which is not expected. Regardless, history shows that the Chinese equity market and the real economy are often uncorrelated. Chinese offshore H-shares have seen the traditional discount to their onshore A-share counterparts narrow from 43% at the beginning of the year to a six-year low of 17%, signaling a return of both retail and foreign investor appetite. Support can be attributed to optimism surrounding the anti-involution reforms, technology localization potential, and incremental government measures to support the equity market.

India lagged during the quarter due to slower growth, tariff threats, and an unclear path for its AI strategy. However, the government has accelerated the pace of reforms, notably by adjusting the GST (Goods and Services Tax), which could spur higher consumption. Valuations, while still high, have come down after underperforming broader EM by close to 20% during the quarter. We are now starting to see signs of stabilization within a context of still-positive long-term potential.

The Latin American markets have once again been dominated by politics. Much of the early-year rally in Brazil was driven by mean reversion, along with expectations that Lula would not run in the next election. Trump’s support for Bolsonaro has re-polarized the political landscape, though the US leader has now agreed to meet Lula. Ongoing performance in Brazil will likely be heavily influenced by electoral noise and the trajectory of the Selic rate.

Argentina experienced significant turmoil as the government depleted FX reserves to defend the peso and contain inflation ahead of October’s critical midterm elections, pushing the country to the brink of economic collapse and leaving it reliant on potential US financial support. Given this backdrop, we maintain no exposure to the country.

In the CEEMEA region (Central and Eastern Europe, the Middle East and Africa), Saudi Arabia made gains following the announcement of forthcoming changes to foreign ownership limits, while South Africa benefited from the strong rally in gold.

In this context, Carmignac Portfolio Emergents delivered a solid performance of +11.35%. As is typical for the Fund, performance over the quarter was predominantly driven by strong stock selection. Pleasingly, this performance was diversified across both countries and sectors, with our top ten contributors spanning five countries and five sectors. The detractors this quarter, however, were more concentrated in one area, with five of the bottom ten contributors coming from India. It should be noted that while absolute performance in India has been weak, our stock selection in that market has been significantly positive and reflects our discipline and ability to identify and value assets on a risk-adjusted basis.

Taiwan was by far the largest positive contributor on a country basis, owing to positions in mid-cap AI hardware supply chain names Elite Material and Lite-On, which underline our strategic approach to AI investment opportunities — looking beyond the large caps in the limelight in pursuit of the most compelling investments. Diversifying our exposure through lesser-known stock picks has not only helped us deliver enhanced returns, but also spread risk across different companies and various parts of the technology value chain.

China and Brazil also contributed positively, with our large positions in Chinese online discount retailer Vipshop and Brazil’s utilities company Eletrobras experiencing strong rallies and closing some of the significant valuation anomalies that had previously attracted us to these names. Meanwhile, Mexico and Indonesia detracted during the quarter.

On a sector basis, Industrials was a key highlight, with our positions in Didi (China’s leading ride-hailing company) and CATL (Chinese battery manufacturer) being the main contributors. Our selective positioning in Consumer Discretionary detracted, as we continue to avoid index heavyweights such as Alibaba, which surged on renewed AI optimism. Despite the share price rebound, we believe earnings headwinds persist and that valuations do not yet justify exposure.

Portfolio activity was limited, with one new purchase and one sale during the quarter.

We reinitiated a position in the Chinese battery leader CATL. We had originally purchased CATL in May during its Hong Kong IPO, but quickly sold it after the stock performed very strongly in the initial days following the listing, resulting in an atypical premium to its A-share listing. In July, we observed that the premium had risen to 23%, prompting us to repurchase CATL — this time via the A-share. CATL stands out as a global leader and is particularly well positioned within the energy transition theme thanks to its energy storage business — an area essential for the advancement of renewable energy. The rapid adoption of autonomous driving technologies also represents a significant tailwind for CATL, as self-driving vehicles will require substantially more onboard energy.

We exited our remaining position in Galicia, an Argentine bank, at the beginning of the quarter due to concerns about the country’s economic and political environment, where we felt the risks were too high.

More broadly, the portfolio became slightly more concentrated during the quarter, ending the period with 37 holdings, within the 35–45 target range. Our key actions involved ongoing trimming of strong performers to take profits and redeploying the proceeds into undervalued or lagging names with solid upside potential.

Looking ahead, with the MSCI EM Index now trading at around 14 times forward earnings, we are becoming more mindful of the potential for a short-term pause in performance. However, this comes in a context where gross margins, Return on Equity (ROE) and Return on Invested Capital (ROIC) levels have also improved. As for China, we note that Chinese equities have only recovered a fraction of their three-year underperformance.

We expect increasing volatility in the coming months, and it is likely that near-term market performance will, to a large extent, be dictated by the outcome of the Trump–Xi meeting at the end of October. Nevertheless, we continue to believe that the longer-term EM rally still has multiple supports, including USD weakness, rate cuts, improvements in corporate governance and industrial policy across the region, greater certainty on trade dynamics, AI supply-chain beneficiaries, and continued earnings growth — all alongside broader global diversification of positioning. These new dynamics highlight that Emerging Market equities are no longer simply a high-beta proxy for developed market growth. Instead, they are increasingly viewed as an alternative to slowing developed markets.

While we are somewhat more cautious towards the frothier areas of the market, we remain confident that we continue to hold companies with structural advantages in areas such as technology, the energy transition, and mobility. We observe a new, more growth-oriented environment, but remain firmly committed to maintaining a strong balance across the portfolio and valuation discipline — always anchored in fundamentals rather than market sentiment.