Carmignac Portfolio EM Debt

August was marked by normalising US employment data, with job creation returning to pre-covid levels and unemployment rising to 4.3%.

While these raised concerns about the risk of a hard landing for the US economy, the sell-off was short lived, as other indicators showed a picture more consistent with a soft landing.

The other major event of the month was the Jackson Hole meeting, where Jerome Powell gave a dovish speech that added to the month's “bull-steepening”.

Growth remains sluggish in Europe and disappointing in China. In China, manufacturing activity continued to contract, as did domestic activity and oil consumption.

August was a strong month for EM assets, with returns from both hard currency and local currency assets. EM currency returns were strong in Asian currencies which are benefitting from the unwinding of the JPY carry trade at the expense of Latam currencies particularly the Mexican Peso,

In LatAm, we continue to see heightened volatility in Brazilian interest rates, where the market is pricing in an increasing number of hikes over the next year. On the EM external debt front, we have seen a rebound in spreads in August, which have tightened by around -12 bps.

The Fund ended the month with a positive absolute return but underperformed its benchmark.

The main contributors to performance this month were rates and credit, while our currency positioning suffered.

Within rates, our long position in Mexican local rates made a positive contribution, as did our long position in the US rate component of the portfolio.

Within credit, EM external debt spreads were the main positive contributors, led by our long positions in Argentina and Côte d'Ivoire.

Lastly with regards to currencies, the USD was the main detractor from performance, while the South African rand performed reasonably well during the month.

In this context of soft landing, we continue to like duration assets. In fact, we have increased duration mainly through long positions in LatAm local rates and US real rates. For the latter, we believe the market is already pricing in a large number of rate cuts.

Particuarly in LatAm, Brazilian rates are pricing in a large number of rate hikes, which we believe are overdone.

We are cautious on external debt and have added hedges to protect the portfolio from a risk of spread widening. We continue to favour special situations in countries where the economy is undergoing important restructuring or improvement.

Finally, we remain guarded on currencies with particularly low USD and emerging market currencies’ exposure. The sharp drop in commodity prices (oil in particular) is ominous and reflects concerns about global demand and China’s increasingly weak economic performance.