The objective is to outperform the benchmark, over using discretionary management on all bond markets from emerging countries.
The month has been marked by a continuity of the trend established since the beginning of the year but as a trader said this month : “You have a lot of risk events, but the market is still remarkably relaxed and bullish. This shows you once again the power of technicals”. Still driven by flows, EM Debt markets fared well with hard currency debt up +0.19% (EMBI Global hedged in EUR) and local currency debt up +2.31% (GBI-EM index). With -0.46% our fund Edr Emerging Bonds underperformed mostly on some volatility in Venezuela at month end and the initiation of a new special situation strategy. The momentum is still there regarding inflows into EM debt (+$22.9bn in YtD) although they seem to be more dominated by retail money or cross over investors rather than dedicated EM investors. The later tend to view valuations as pricey and a record primary issuance YtD is starting to act as a headwind.On the currencies front the rebound of some majors like the Mexican peso or the Turkish lira has gained further strength. Regarding the peso, it benefited from Navarro and Ross constructive' s tones on Mexico and a better than expected economic picture. The rand in South Africa is the exception, victim of renewed political volatility after a sharp rally from its weakest point in 2016. On the bond side, we have been hurt by our Venezuela exposure. After the huge rebound of last year and during the first months of this year, political developments and a coming bond maturity in April have put pressure on the credit lately. However, we are still confident about the long term potential of Venezuela, with or without a debt restructuring on the way, given valuations and the still high willingness to pay. On the opposite, we strongly benefited from our Ukraine exposure thanks to a JP Morgan research paper about GDP warrants. These securities rebounded c. +25% since then. One new story on the special situations front has appeared in Croatia with the financial stress of the biggest retail and food conglomerate in the Balkans. It represents an interesting asymmetrical risk with a significant potential of rebound. Indeed, there is a huge incentive for the government and the parties involved to reach a constructive solution as the company represents around 15% of Croatia's GDP and 40 000 employees. Other specific opportunities might arise while we keep or could further reduce our cautious market exposure.
(1) The rating grades the funds on a scale from 1 to 7. This rating system is based on the average fluctuations of the net asset value over the past five years. It corresponds to the variation range of the portfolio upwards and downwards. If the net asset value is less than 5 years old, the rating is determined by other regulatory calculation methods. Historical data such as those used to calculate the rating may not be a reliable indication of the future risk profile. The current category is neither a guarantee nor an objective. Category 1 does not signify a risk-free investment.