The objective is to outperform the benchmark, over using discretionary management on all bond markets from emerging countries.
The July rally didn't last and in the usual August context of low liquidity we have witnessed a sharp correction in EM assets. This was driven by currency crisis in Turkey and Argentina. Other EM currencies were hit on the follow. The EMBIG index is down -1.92% (hard currency debt) and local currency debt much more at -6.29 (GBI-EM index). EdRF Emerging Bonds is down by -8.65% (I share USD) with the turmoil in Turkey and Argentina hitting us both on our local currency and sovereign credit exposures. Turkey was first in the headlines as the confidence crisis got more acute. Frictions with the US over the jailed pastor case were a trigger. Populist speeches by Mr Erdogan and the lack of concrete measures to address the crisis by his son-in-law/finance minister, added to the panic. The currency lost 25% over the month, an extreme move knowing that it had already been depreciating way beyond the inflation rate over the last 3 years. Qatar offered its support with USD 15bn of funds making it unlikely that authorities turn to the IMF at this stage given ideological resistances. All eyes will be on the September central bank meeting given its perceived loss of independence so far. The sovereign itself has low debt levels and has managed a balanced budget over the past 15 years. However we are in the middle of a confidence crisis with weaker institutions, an autocratic regime some weaker banks and corporates but still many strengths in a dynamic and diversified economy that has been able to withstand more violent shocks in the past. We believe that valuations and positioning versus actual risks make it one of the most attractive investment cases around. Turkey is strategic both for Europe and the US and Erdogan also knows he needs access to these markets and support from the business community in order to survive over the long run. The contrast with Argentina couldn't be greater as authorities there have taken all the right steps to contain the crisis, raising rates sharply and asking the IMF to front load its recent USD 50bn program. Despite that the Argentine peso also lost 25% over the month, thus putting the good and the bad pupil in the same basket. Beyond any political or monetary responses, the key to a turn-around in both countries lies with local investors and corporates. The price of a dollar has to become expensive enough as to make people think it twice before buying for hedging or savings purposes. This reaction along with an expected sharp readjustment in current accounts will be key. In Venezuela a bizarre drone attack on the president during a military parade was emblematic of the rising tensions within the country. Despite some last resort measures, the context is not really changing : hyperinflation and dollars getting scarcer as oil production continues its downtrend. This puts the regime under increasing pressure not mentioning the refugee crisis which is growing into a continent wide issue. Venezuelan bonds lost more than 10% on EM funds outflows rather than specific factors. As in previous stormy periods we are clearly in a moment when we lay the ground for the performance over the next 3 years but suffer before getting to be fully invested. Regarding market positioning, as much as we seem to have reached some form of capitulation on local currency assets, the picture is less positive for hard currency debt where most investors still have a small overweight. Apart from specific cases, spreads have not either corrected to extremes seen before. As a result we will remain opportunistic in deploying our cash.
(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.