Carmignac Portfolio EM Debt

The widening gap between monetary policies on each side of the Atlantic, intensification of geopolitical risk (escalation of reprisals in the Middle East) and doggedness of inflation (in part due to commodity prices) led to a bond market correction in April. Government bond yields shot up, especially in the United States where the 2yr hit 5%. This has mainly come about because the US economy is outperforming and, in particular, US employment data for March was very strong (303,000 job starts). Although GDP growth slowed in the first quarter (annualised rate of 1.6% q/q), it seems that employment, inflation and to some extent personal consumer expenditure (+2.7% y/y) had a greater influence on market developments.

Investors lowered their rate-cutting expectations as the FOMC meeting approached. Some even fear an increase in the Fed Funds rate if growth stays close to 3%.

Economic growth is much less robust in the Eurozone, although it has stabilised and in some areas, especially services, is even starting to pick up.

Despite the Chinese government’s limited attempts to stimulate its economy and the need for consolidation, the latest figures support the idea of a global economy recovery.

On foreign exchange markets the US dollar appreciated, mainly because the US economy is outperforming and investors have lowered their expectation of Fed Fund rate cuts. The yen was the big loser, closing at a level unseen since 1990 despite Japanese authorities’ attempts to shore up the national currency.

In the current economic climate, our modified duration is around 385 basis points, slightly lower than it was in March. At a local debt level, we remain focused on countries like Mexico, where the rate-cutting cycle has started and is likely to continue. We are also long on Brazil where real interest rates are still very high. Bonds in China, where we are expecting more easing, look good too.
The global economic recovery continues to support commodities such as copper and oil, which should benefit emerging market debt and the currencies of emerging commodity-producing countries. We therefore have positive expectations for the Brazilian real and Chilean peso, as well as certain Asian currencies such as the won, as AI should lift the South Korean economy, and the Indian rupee, on account of India’s strong economic growth.

We are long on emerging market debt denominated in hard currencies, but have been taking profits on our best performing positions, such as those in Ecuador and Romania, since the beginning of the year.