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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 collapse of the Government in the Netherlands, due to disagreements over the fiscal pact, renewed market fears of a fresh Eurocrisis. However, positive data from China (credit growth, money supply) helped dissipate hard landing fears and visible signs of economic easing improved investor sentiment.
A possible additional 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 as well as hard and local currency 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, which is met with some success against all odds.
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 there.
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.
EM Bond funds saw inflows of USD 1.7 bn during April, majority in Hard Currency given the overall cautious outlook. Corporate spreads vs Sovereigns widened slightly during the month by 10 bps. The spread between the CEMBI Broad High Yield and Investment Grade Indexes also widened gradually during the first half of the month and then tightened very sharply as high yield names were well bid. Healthy consolidation in EM assets over the past two months provides a good opportunity to add risk in our opinion.
We maintained our carry and diversification strategy over the month which made the fund to perform by 1.22% in gross absolute terms. Our underperformance versus the benchmark was due to our short US interest rates and EM spread duration position which we entered in the beginning of the month, as well as our strategic underweight in Ukraine and slight overweight in Argentina. The window for primary market issuance increased considerably during the period and we participated in several new deals, which offered attractive valuation such as: Croatia 2017, Evraz 2017 (Russian steel producer), Dubai 2022 and Pertamina 2022 (Indonesian quasi-sovereign oil company). These investments were partially funded by selling our EM local bonds positions in Mexico, Russia and South Africa. As a higher market beta proxy, we entered a short protection position on the Eastern Europe sovereign CDS Index CEEMEA SOVX 5Y for 5% of the fund in order to capture positive market momentum at the end of the month. This strategy had a small positive contribution as the index closed the period tighter than our entry level.