Performance

After a brief period of spread widening in September, October launched with the bond market’s rally. However, the mood turned to risk-off in the second half of the month, due to the increased uncertainty regarding the economic outlook amid a surge in new Covid-19 cases. Our fund finished the month in positive territory: 0.4% return in October, with the YTD gross return rising to 12.9%. Pre-election period in the US has been less volatile than initially thought by most of the market players. While polls have been showing an increase in the gap between Biden and Trump (with the first one leading the polls), a general opinion has formed that a democratic sweep to victory would be favored by the markets. The main reasoning behind it was that it would allow a quicker adoption of the fiscal stimulus program, with the economic recovery at the forefront of investor’s preoccupied minds at the moment. Nevertheless, a rise in corporate taxes and increased regulations, especially for tech companies, should Democrats win, might possibly ensue a negative response on the markets. At this point, it is useless to predict the reaction of the markets. What is certain is that the worst outcome for the markets would be a highly disputed result of the elections, which would mean a prolonged period of uncertainty. However, any bouts of volatility could provide attractive buying opportunities for us. Economic data is painting a mixed picture, as there are signs that the recovery is losing momentum. Economic activity in the US continued to expand in September, however, at a slower pace. Considering that the lockdown measures to curb the rise in infections may expand in the following months, the risk of contraction in the fourth quarter is becoming more and more likely. The cause for more fiscal stimulus to support the recovery remains significant and governments may be in the situation where they would need to provide even more fiscal support than back in spring. The first part of the month provided some attractive investment opportunities on the primary market. We acquired new issues of the United Arab Emirates utility company National Central Cooling Co (BBB/Baa3), Union Bank of the Philippines (Baa2), the Turkish food and beverage manufacturer Ulker (B/BB-/B+) and the Chinese tech company Lenovo (BBB-/Baa3/BBB-). We did not acquire anything on the secondary market. Uncertainty is high at the moment, with the risks to the economic recovery and the outcome of the US elections and their impact on the markets as the main headwinds. On the other hand, we believe that the Federal Reserve will step in with further asset purchases to support markets if needed. At its latest policy meeting, ECB announced its readiness to increase its asset purchasing programs, and the message was favorably received by the markets. Our fund closed the month with 10.5% leverage, average duration of 4.6 years and average yield-to-worse of 3.0%.