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Latest Fund Manager commentary:
In April, markets continued their consolidation as macro concerns returned somewhat, with employment data in the US disappointing. This resulted in a reversion of the trend in March, of US Treasury yields to trade higher, and consequently the US 10 year yield fell back below 2%, from its March high of 2.39%. In Europe, the outlook for an indecisive election result in Greece and a victory of the Socialist François Hollande in France renewed fears of a reconsideration of the fiscal compact and thus a possible re-ignition of the zone’s debt crisis. However, positive data from China (credit growth, money supply) helped dissipate hard landing fears and visible signs of economic easing improved investor sentiment.
An possible funding boost of USD 430 bn for the IMF could be a tailwind for EEMEA countries, however ruffled they are currently by renewed concerns of the Eurocrisis. Hungary’s progress with the EC for an aid package led to strong upmoves in the HUF and its local and external bonds. Although this is a certain positive, a potential deal for Hungary with the IMF isn’t a given and will be hard fought. Turkey’s central bank kept rates on hold, while adopting an increasingly hawkish tone given inflation concerns. For now, it rules out a “conventional” rate hike and seeks to address the problem with FX interventions to prevent imported energy inflation.
In Brazil, the Copom cut rates by another 75 bps firmly continuing on its easing path and indicating that further cuts are possible. Given the tight labour market, inflation expectations are bound to start building up in Brazil. Driven by an uptick in the US, growth in Mexico surprised on the upside, while inflation moderated, prompting the central bank to keep rates unchanged. The Argentinean Government’s expropriation of YPF made headlines and was a dampener on investor sentiment, putting considerable pressure on spreads.
In China, the PBoC widened the trading band of the CNY to -/+ 1%, slowly moving towards a free floating exchange rate. On the back of improving investor sentiment and economic data in China, Chinese names, particularly high yield and real estate, registered good performances. A surprise rate cute of 50 bps by the RBI in India, despite inflation concerns, outlines growth fears and the necessity to boost confidence. However, the RBI expressed doubts on its ability to cut rates further. Indonesian lawmakers failed to implement a fuel price hike by 33% but were able to enact a conditional reduction in fuel subsidies which commences in May.
Given the depressed growth background of developed markets, we continued to maintain a non-directional approach to investing, preferring relative value and idiosyncratic risk to global beta. Before the rate cut decision from the RBI, we took profit on our payer position on the 1y NDOIS in India, with a small profit. In Turkey, we took profit on our linker position, after 50 bps rally in the breakeven in both the 5y and 10y tenor. We moved to an overweight position on the long end of the nominal curve in Turkey, as the Central Bank has shifted to a clearer anti-inflation stance. In FX, we hedge against a fall in metal prices (on the back of soft growth outcomes in China and Europe) through a short CLP position. We also closed our U/W in Hungary as progress is being made on the IMF deal. Overall, both our FX and duration exposure has been flat versus the index. The portfolio has closely followed the index, returning 0.93% (vs 0.96% for the benchmark) for the month.