The objective is to outperform the benchmark, over using discretionary management on all bond markets from emerging countries.
Another boring and short month in February, with global volatility indicators (VIX being the reference) too low for comfort on an historical basis given the global geopolitical context. Driven by flows, EM Debt markets fared well with hard currency debt up +2% (EMBI Global hedged in EUR) and local currency debt up +1.80% (GBI-EM index). With +3.42% our fund EdR Emerging Bonds (I share) outperformed, mostly on a come-back by some of the most beaten down currencies like the Turkish lira and Mexican peso. In Mexico the central bank launched an active FX swap program to manage currency volatility without burning reserves. This gave further support to the peso rally as investors have been reassessing the reality of the Trump risk factor for Mexico.In hard currency sovereign debt, Iraq, Egypt, Zambia and Belize were among the top performers. Among Asian corporates, a possible investment in Noble by China owned Sinochem gave a further boost to the bonds which rose 10%. In the background, the deleveraging process is still ongoing at the company.Inflows into the asset class have kept their positive momentum reaching USD 10bn YTD, thus marking the second best start of the year since 2004. 2013 was the record, bringing back some painful memories
Talking about records we have seen the fastest ever period of EM new issuance for the first two months of the year. Investors are not as stretched in terms of market positioning as back in early 2013, however crossing that information with an active primary market issuance and rich valuations, we can say that EM hard currency debt is not so attractive as a whole. As a result, this benign environment has been more of an opportunity to increase some hedges at a reasonable level be it on the EM debt index or on China sovereign risk. As another hedge, we also bought a small amount of volatility exposure given the record low levels reached. We remain invested in our top sovereign credit convictions and a couple of local currency markets where we still see some potential left.
(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.