Performance

The month of September started on a positive note amid an easing of geopolitical tensions, mainly due to the announcement of a new scheduled meeting between the US and the Chinese delegations for resuming trade negotiations. Our fund added 0.6% in September thanks to spread tightening in Turkish and Mexican bonds, which overweighed the rise in US Treasury yields. Towards the end of the month the trade rhetoric turned negative, with some statements both from USA and China unsettling the markets. In conjunction with the disruptions in oil production caused by an allegedly Iranian drone attack on Saudi Arabia’s oil facilities on 14 September and the impeachment inquiry initiated by the Democratic Party in the US against President Donald Trump, the reescalation in trade tensions contributed to an increase in volatility in the second half of September. As expected by the majority of market participants, the US Federal Reserve cut the main interest rate by 25 bps to 2.0% on 18 September. Chair Jerome Powell said that “moderate” policy should be sufficient to sustain economic growth, but left the door open to a more aggressive policy. Earlier, on 12 September, the ECB cut the deposit rate by 10 bps to minus 0.50% and relaunched its quantitative easing policy. The downturn in global manufacturing amid the ongoing trade tensions will continue putting pressure on Central Banks around the globe. The IMF revised upwards its growth forecast for Turkey from -2.5% to 0.5% for 2019. Turkey has been one of our main investment ideas this year, with an average share in our portfolio at 10% and we continue being optimistic about the prospects of the Turkish bond issuers in our fund. The Mexican government announced a new $5 billion cash injection in Pemex (BBB+/Baa3/BB+) to help relieve its debt burden. The government has no other choice than to solve company’s problems, as its financial downturn is likely to trigger a downgrading in the country’s credit rating. In conjunction with the previously announced permission to resume joint ventures, this supports our positive view on Pemex and we keep holding its bonds in the Fund portfolio. This month, we took advantage of the increased activity in the primary markets and participated actively, reducing the cash holdings from 5.9% to 1.4%. We received an allocation in a 5-year new issue of Bank of Sharjah (BBB+), a United Arab Emirates bank, as well as 10-year offering Mexican chemical manufacturer Alpek (Baa2/BBB) and 10-year primary placement of Pemex (Baa3/BBB+/BB+). We also acquired 3- and 5-year offerings by Brazilian lender Votorantim (BB-/Ba2), 10-year new bond issued by African Export-Import bank (BBB-/BBB+) and a 10-year new issue by Republic of South Africa (BB/Baa3/BB+). The fund closed September with 3.81% average yield to maturity and an average duration of 4 years.