Carmignac Portfolio EM Debt

The main news at the beginning of the year was the inauguration of Donald Trump, with the issuance of several executive orders, including the upcoming tariffs on its main trading partners.

The Federal Reserve opted for a pause in its cycle of rate cuts at its meeting, despite GDP growth in Q4 2024 being less vigorous than expected at +2.3%, but considering a vigorous level of activity, as shown by employment data and consumer spending.

The European Central Bank, for its part, lowered its key rate by 25 basis points to 2.75% as growth in the zone stagnated in the last quarter of 2024.

Emerging local debts performed well over the month, particularly in Brazil, with 10-year rates falling, after a sharp rise at the end of 2024. Mexican and Colombian local rates also fell, with their local bonds posting good returns.

Emerging external bonds (in hard currency) performed well in the wake of a tightening of credit spreads over the month.

On the currency front, the pause in the appreciation of the dollar benefited EM currencies, which performed well. In this respect, we can mention the Latin American currencies, which rose over the month.

In this context of a slight easing of interest rates in the United States, the Fund posted a positive performance, slightly below its reference indicator.

On the local debt side, we benefited from our positions on Brazilian and Czech local rates.

On the external debt side, our positions on the sovereign bonds of Ecuador, Egypt and Argentina made a positive contribution to performance.

On the other hand, in a context where credit spreads tightened, our protections aimed at reducing our exposure to this market made a negative contribution.

Finally, on the currency front, we benefited from our positions in the Brazilian real, the Colombian peso and the Polish zloty. However, our short positions in the Chinese yuan somewhat weighed on performance.

In a context of resilient global growth and inflation that continues to fall gradually, we expect the main central banks of developed and emerging countries to gradually continue their monetary easing. Thus, we are maintaining a relatively high level of modified duration, which has nevertheless been slightly lowered at the end of the period.

On local rates, we favour central banks that are lagging the cycle, such as Mexico, Brazil and some Eastern European countries (Hungary) that benefit from high real rates.

On the emerging external debt front, we are cautious about longer-term investment grade debt, as spreads are already relatively tight. That said, we see opportunities among rated high-yield securities, such as Ivory Coast and Colombia. We are also favourable to some lower-rated issuers with improving fundamentals, such as Argentina.

Over the month, we strengthened our positions in Hungarian external debt following our trip. Hungary has a very orthodox monetary and fiscal policy, with inflation under control and a current account surplus. Despite these sound fundamentals, the country offers an attractive spread.

On the contrary, we have reduced our positions on Romanian external debt. Credit spreads have widened in a context of increased political risk ahead of the elections, and the deterioration of the fiscal deficit, which rose to 8.7% of GDP in 2024, well above the 5% target.

On credit, we are maintaining our positive, albeit cautious, bias due to high valuations and are maintaining a decent level of hedging on the Itraxx Xover to protect the portfolio from the risk of widening spreads

Finally, with regard to currencies, we now have moderate exposure to the US dollar, following the strong rally triggered by Trump's election, and we are maintaining limited exposure to emerging market currencies. However, we are diversifying our exposure to the currencies of central banks that are less accommodating, while the Fed continues its monetary normalisation and China implements stimulus measures, a selection of Latin American currencies (BRL, MXN, COP), the Hungarian forint, and a short position on the Chinese yuan.