Carmignac Portfolio EM Debt

US growth continues to hover above its historical average at +2.8% in the third quarter, benefiting from resilient domestic demand. All indicators point to an increasingly resilient US economy. Inflation also proved resilient, with a smaller-than-expected decline in the headline component to +2.4% year-on-year, and a reacceleration in core inflation to +3.3% year-on-year.

This environment of resilient growth and market anticipation of a potential victory for D. Trump led to a rise in US yields, with the US 10-year gaining +50bp, and a strengthening dollar, which weighed on emerging assets.

Risk aversion has increased, with credit spreads widening by +3bp on the Itraxx Xover index over the month.

On the currency front, the US dollar strengthened, driven by resilient data implying a slower Fed easing cycle and the increased likelihood of a Trump victory. Conversely, this weighed on emerging market currencies.

In an environment marked by high interest-rate volatility, the Fund ended the month with a negative absolute performance, but nevertheless outperformed its reference indicator.

Against a backdrop of rising US interest rates and risk aversion, our investments in local debt weighed on performance, while our positions in external debt and currencies proved resilient.

On the interest rate front, our long positions in local Brazilian and Hungarian rates made a negative contribution.

On the credit side, our investments in emerging countries' external debt made a positive contribution. In particular, we benefited from our allocation to the sovereign debt of Argentina and the Dominican Republic, which proved resilient, being less vulnerable to the volatility linked to the US election.

Finally, on the currency front, while we suffered from the weakness of certain emerging currencies, we benefited from our increased exposure to the US dollar, which we strengthened ahead of the US elections.

Against a backdrop of a soft landing for the economies and inflation continuing its gradual decline, we remain constructive on emerging markets and maintain a relatively high level of modified duration, at around 500 basis points at the end of the period.

On the other hand, we believe that the US elections, and in particular a possible victory for D. Trump, could be a source of volatility for emerging markets. This is why, ahead of the major unpredictable event of the US elections, we have reduced the portfolio's overall risk, by reducing our allocation to certain emerging currencies and local debt (Mexico).

On the contrary, we have increased our exposure to real rates and the US dollar, in particular through steepening strategies in the United States, where the longest maturities are likely to be the most affected, especially in the context of a Trump presidency.

On credit, we maintain our positive, albeit cautious, bias due to high valuations, and maintain a substantial level of hedging on Itraxx Xover to protect the portfolio from the risk of widening spreads. Over the period, we have increased our exposure to Argentine external debt, which we feel is less vulnerable to the US election risk.

On the EM external debt front, we continue to favor special situations in countries whose economies are in the process of restructuring or improving significantly (Ivory Coast).

Finally, we remain cautious on the currency front, with increased exposure to the USD and a reduced allocation to EM currencies. We do, however, maintain selective exposure to the currencies of countries with less accommodative central banks, such as the Japanese yen and Brazilian real.