Performance

Despite the overall positive macro environment, global economic growth still led by the US with the unemployment at a half-century low, and ca. 85% of companies outperforming analyst forecasts according to the 3Q18 financial results, October brought back higher volatility to the markets. This seems to be primarily triggered by a number of negative factors such as the ongoing US-China trade conflict, the Italian crisis that burst out after the government set 2019 budget deficit at 2.4% of GDP, and turmoil at certain emerging markets. In this environment, following the Fed's September rate hike and subsequent Jerome Powell’s claims about a “remarkably positive outlook” for the US economy, the 10-year US Treasury yields rose above 3.2% in the first half of October for the first time in the last seven years. Subsequent decline in risk appetite and investors’ flee to quality reduced the US Treasury yields, with the 10-year bonds settling 3.14% at the end of October. The welcome news that boosts hopes for the resolution of the global trade conflicts is Canada’s reaching a deal with Washington and joining the new agreement between the USA and Mexico meant to replace the existing NAFTA. In Mexico, the positive effect from the trilateral trade agreement with the USA and Canada was overshadowed by the referendum at which the majority of the voters supported the president’s proposal to cancel the construction of the new airport in the capital. At the end of October, the Mexican peso lost 8.7% and stood at MXN 20.34 per US dollar. As we predicted, a Turkish court released American pastor Andrew Brunson. After the September rally in the Turkish market, this news had hardly any noticeable effect on the Turkish corporate bonds, but better relationship with the USA is expected to support the Turkish securities in the medium term. Investors’ concerns about a potential economy slowdown triggered by the trade wars, and the latest data showing increasing oil reserves in the US storage facilities put pressure on energy prices in October. Even the US-Saudi Arabia tensions around the killing of a Saudi journalist in Turkey, which the US attributes to members of the Saudi ruling family, could not support oil prices. As a result, Brent lost 9% in October and traded at USD 75 per barrel. In October, we were focused on the primary offerings but most bonds fixed yields below our limits. As at the end of October, the Fund’s cash position stood at 1.6%, while the average yield and duration were 5.5% and 4.9 years, respectively.