Carmignac Portfolio EM Debt: Letter from the Fund Manager - Q4 2025

In the fourth quarter of 2025, Carmignac Portfolio Emerging Debt delivered a net performance of +3.09%, while its reference indicator posted a performance of +3.08%. Over the full year 2025, the Fund achieved a performance of +8.13%, compared with +8.55% for the reference indicator supported by all its performance drivers, but slightly underperformed on a relative basis due to currency effects, notably the US dollar.

The key event of 2025 was the inauguration of Donald Trump as the 47th President of the United States. His return to the White House was marked by a series of radical policy announcements, notably on immigration and tariffs, which initially triggered heightened volatility in bond markets. However, the subsequent implementation of these measures, combined with a visible slowdown in U.S. economic growth, quickly disappointed investors and led to a decline in long-term interest rates. The U.S. 10-year Treasury yield ended the year at 4.12%, down from 4.57% at the beginning of the year. Despite inflation remaining relatively persistent at around 3%, the Federal Reserve (Fed) adopted a more accommodative stance in response to a weakening labour market, delivering three policy rate cuts in the second half of 2025. These dynamics culminated in a particularly unusual final quarter of the year. On October 1st, the U.S. federal government entered a shutdown following Congress’ failure to pass a budget, significantly complicating market analysis amid the absence of key employment and inflation data for 43 days. Despite this institutional paralysis, the Fed continued its easing cycle, implementing additional rate cuts during the quarter, reinforcing the accommodative policy stance that had gradually taken shape over the course of the year.

Emerging markets evolved within a more favourable macroeconomic environment. Despite persistent geopolitical risks and initial concerns surrounding new trade tariffs, they proved more resilient than expected over the year. Since the beginning of the year, the weakness of the U.S. dollar had been a key driver of the strong performance of emerging market bonds, reinforcing the attractiveness of the asset class and resulting in returns above expectations. Fundamentals remained solid, supported by resilient growth and contained debt levels, in contrast with the more challenging fiscal dynamics observed in many developed economies. Continued disinflation, alongside still-elevated real interest rates, provided emerging market central banks with ample room to initiate or extend easing cycles while maintaining policy credibility. This trend extended into the final quarter of the year, with central banks such as Mexico, Poland and South Africa continuing to ease monetary policy.

This backdrop was particularly supportive for local-currency debt, with performance driven by attractive carry and gradual policy rate cuts in several countries, notably South Africa and Poland. Stabilizing inflation expectations and improving macroeconomic balances further underpinned the asset class.

Hard-currency sovereign debt also benefited from resilient global growth, a more supportive U.S. interest rate environment in the second half of the year, as well as favourable technical factors, despite already tight valuations.

Emerging market currencies delivered differentiated performance. High-carry and commodity-linked currencies benefited from disinflation, attractive real interest rate differentials, solid terms of trade and the depreciation of the U.S. dollar.

During the quarter and throughout 2025, we maintained relatively high duration exposure across both hard- and local-currency debt to benefit from the monetary easing cycles initiated by several central banks, which proved supportive of performance.

Hard-currency sovereign debt was the main positive contributor over the quarter and the year, driven by exposure to high-yield issuers such as Egypt, Ivory Coast and Ecuador. In these markets, attractive yields persist despite solid fundamentals, creating compelling mispricing opportunities. Ivory Coast remains a key conviction, supported by robust 6–7% growth, sound fiscal management under IMF oversight, and improving medium-term prospects. President Ouattara’s re-election in October with a decisive majority reinforced policy continuity and investor confidence, while euro-denominated bonds continue to offer yields above 8%, providing attractive carry and potential for spread tightening. During the fourth quarter our long positions in Argentina sovereign debt were the largest contributors, benefiting from the post-election rally following legislative elections that were positively received by investors.

In local-currency debt, long positions in countries offering high real interest rates, such as South Africa, Poland and Hungary, contributed positively as central banks began gradual easing cycles at the start of the year and continued them during the quarter. Our long exposure to Hungarian local debt also contributed positively to performance, as Hungary remained one of our key convictions, benefiting from declining inflation and attractive yields that allowed us to capture carry, while a significantly improved current account and moderate wage dynamics supported the macroeconomic backdrop. Overall, local-currency exposures made a positive contribution over the year and quarter; however, our long position in Colombian local-currency debt detracted from performance.

On the currency side, the Fund benefited from its exposure to emerging market currencies amid a broad weakening of the US dollar in 2025, notably through positions such as the Brazilian real. Performance was further supported in the fourth quarter by exposure to commodity-linked currencies, particularly the South African rand and the Chilean peso, which benefited from resilient commodity prices especially copper and an improvement in global risk sentiment.

Conversely, credit protection implemented via the iTraxx Crossover index, designed to hedge against a potential widening of credit spreads, detracted from performance.

Going forward, in a context of easing inflation, accommodative monetary policies, resilient fundamentals and a weaker U.S. dollar, we remain constructive on emerging market debt. We believe the asset class continues to offer attractive carry, improved credit quality and compelling diversification versus developed markets. The fund currently offers a yield of around 7.8% (including currency carry) and maintains a high duration of approximately 640 basis points (as of 31/12/2025), evenly split between local and hard currency bonds.

On the local bond side, we maintain a significant allocation to local-currency debt, focusing on markets offering high real yields. In this context, our exposure is concentrated in countries such as South Africa, Poland, the Czech Republic and Hungary, complemented by selective positions in Latin America, notably Brazil, Peru and Mexico.

Turning to sovereign credit, we remain overweight hard-currency debt, favouring high-yield issuers with solid fundamentals and attractive valuations, including Ivory Coast, South Africa, Egypt and Turkey. This positioning continues to be supported by a favourable macroeconomic environment, strong technicals and elevated carry.

Regarding corporate credit, carry remains attractive, particularly in the energy and financial sectors, with a focus on high-yield issuers rated BB- to B. However, valuations remain tight, with credit spreads at multi-year lows. As a result, we remain underweight investment-grade credit and continue to maintain credit protection through the iTraxx Xover.

Finally, on the currency side, we maintain a selective approach, with a significant exposure to the euro (around 60%) and limited exposure to the U.S. dollar (around 3%). This is complemented by selective positions in emerging market currencies, notably commodity-linked currencies such as the South African rand, Chilean peso and Brazilian real, alongside selected Central and Eastern European currencies.