The objective is to outperform the benchmark, over using discretionary management on all bond markets from emerging countries.
There was a decent rebound in EM debt markets in September, led by EM currencies. Our fund EdRF Emerging Bonds is up by +3.39% (I share USD) when local currency debt gains +2.61% (GBI-EM index) and hard currency debt is up by +1.77% (EMBIG index). These moves were marked by a return of inflows on the asset class, mostly toward the end of the month and largely on passive strategies such as ETFs rather than on active funds; this raises the question of their persistence over time. In Turkey the central bank exceeded investors' expectations by raising rates 625 bps, thus showing some pragmatism despite presidential speeches against the “interest rate lobby”. During the following week, several investor trips, one of which we joined, seemed to have helped turn the momentum for Turkish assets. The finance minister stated that the government was ready to support banks and Akbank, the first of the major banks to rollover some loans, achieved a successful ratio of 104%. This caused a sharp rally in banking bonds, outperforming the rebound in sovereign papers. We had added to our Turkish bank exposure earlier in the month. In the meantime imbalances are readjusting fast on the current account front: the September trade deficit for instance is narrowing by 77% compared to last year. Turkish sovereign spread compressed by 200 bps and the Turkish lira rebounded by 8%. Argentina raised rates one more time by 500bps to a record 65% so stabilize the Peso as details about its revised IMF program came out and the recently named central bank governor resigned. The new sized-up program reaches USD 57 bn with more front loading and allows for a free float within wide moving bands. In contrast the Peso was down by 11% but sovereign spread compressed by over 200 bps. During an investor trip earlier in the month we got convinced, among other things, of a much lower political risk for the 2019 elections. As a result we added to both our credit (via Provinces) and currency exposure, with scope to add more. With more attractive valuations and strong international support for the reformist government, the only caveat remains the still heavy investor positioning. New US sanctions were enacted against key Venezuelan officials including president Maduro's wife. In a break from the past, the Venezuelan leader pronounced an unusually soft discourse at the UN general assembly asking for dialogue with the US, thus underlining the fragility of the current regime. These factors plus flows/short covering caused bonds to rally by 7% on average. In the meantime Papua New Guinea managed to launch its first Eurobond with a 10 year USD 500m issue at 8.375% issued in a deal 6 times oversubscribed. Another sign that we did not yet reach market capitulation during the summer correction
(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.