The objective is to outperform the benchmark, over using discretionary management on all bond markets from emerging countries.
In the footsteps of December, January was relatively calm for EM debt markets, breaking with the pattern of the past 3 years. Most of the volatility was centered on a single currency : the Turkish lira. Our fund EdR Emerging Bonds posted a return of +1.34% with hard currency debt up +1.26% (EMBI Global hedged in EUR) and local currency debt up +2.25% (GBI-EM index). To summarize it, another good month for Venezuelan debt compensated the drag from our Turkish lira exposure.In Turkey, political and geopolitical risks, adding to a less independent central bank were factors that colluded to put pressure on the currency, down 7% over the month. We were approaching moves reminiscent of Turkey's 2001 crisis when the country had a pegged currency, double digit inflation and massive debt loads and imbalances. This is clearly not the case today and debt metrics as well as FX exposure are much more solid. Later in the month, Turkey was downgraded in the sub-investment grade category by Fitch, the last of the big three to do so. This was largely priced in as bonds rallied the following day. Valuations and market positioning have reached attractive levels compared to fundamentals. As a result Turkey has become our second biggest country exposure. The Mexican peso managed to reverse course despite ongoing noise from the white house and some US automobile manufacturers reassessing investment plans in Mexico. Despite the current tension between the two countries and political gesticulation we see Mexico as one of the most interesting investment cases for the coming months. We have kept our exposure to the peso and initiated a position in local bonds. Inflows have been strong amid early year allocations, totaling USD 2.4 bn so far for EM debt, mostly in hard currency.These flows have been met with a substantial amount of primary market issuance including some noticeable jumbo deals from Argentina , Turkey or Egypt for sovereigns and several others for corporates. It seems that many issuers have been looking to use the window and squeeze deals before the US presidential inauguration and the uncertainty coming with the new administration. To put numbers into perspective January issuance reached USD 62 bn compared with USD 27 bn in 2016. For a change (our trusted investors will remember that we seldom participate in primary issues) we took this opportunity to participate in two issues, in Egypt sovereign and a corporate in the Ukrainian agri-business. Overall spreads are relatively tight but the supply and demand picture could remain favorable for a while. We keep focused on our specific stories.
(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.