The objective is to outperform the benchmark, over using discretionary management on all bond markets from emerging countries.
In a global de-risking context, October has been negative for the emerging markets debt universe erasing most of the gains from the preceding month's rebound. We managed to remain positive mostly thanks to our Turkish and Argentine exposures together with our protection on Chinese credit risk.Our fund EdRF Emerging Bonds is up by +0.21% (I share USD) whereas the EMBIG index (hard currency debt) drops -2.23% and local currency debt concedes -1.96% (GBI-EM index). A thaw in US-Turkish relations, coming from the release of Pastor Brunson was reinforced by the gruesome assassination of Jamal Khashoggi in the Saudi consulate in Istanbul. The Saudi journalist and NY Times correspondent was a fierce critic of the regime. Turkish authorities have been skillfully releasing their intelligence to the US government implicating the Saudi leadership. With volatility receding and both local and foreign investors getting back into the Turkish lira, the currency gained 8% over the month. In this context, bank bonds also continued their rally. The currency also came back stronger in Argentina, up close to 15%, as the new IMF program has been approved and markets stabilized. In Brazil the comfortable victory of Jair Bolsonaro was taken positively by the market as his economic team has been perceived as credible and reformist. The big hurdle will be governability as congress remains fragmented. The Mexican Peso was the clear underperformer among EM currencies as the president elect decided to follow a popular vote and cancel the new Mexico City airport project. After a decent post-election rally on the basis of expected pragmatic economic policies, this controversial decision has planted a doubt in investors' minds. Venezuelan bonds were down with PDVSA testing new lows before rebounding after reports the government was considering the idea of creating a new oil company which would inherit all the assets but not the debt of PDVSA. This risk had been mentioned many times in the past in the evaluation of the different risks between sovereign bonds and those from the national oil company. We have always kept the view that both entities were alter egos. As a matter of fact existing judgments by US courts have already pierced what jurists call the “corporate veil”, demonstrating that the sovereign and PDVSA have long been enough imbricated to make this point. In China the background of continuing tensions on trade and weak economic indicators, have caused a widening in credit spread thus benefiting our protection. Given our prospects through the restructuring and price levels, we sold our remaining position in Noble Group bonds and redeployed some cash into Argentine provincial bonds where we still see value. Otherwise, our global positioning didn't change much.
(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.