Performance

Despite a risk-off mood in the beginning of the month, due to disappointing global economic data on the back of US-China trade tensions, October ended on a encouraging note, after news of positive development in the negotiations started pouring in. The parties started the process of negotiating a phase-one trade deal, as a preliminary step towards a final agreement. Our fund added 0.9% this month on the back of a gradual increase in the risk appetite and continuing inflows into emerging markets. The US Federal Reserve cut the interest rate by 25 bp for the third time this year, to a range of 1.50-1.75%, in line with market expectations. Fed Chairman Jerome Powell suggested that this may be the last cut for the near future, as the Fed will not resort to further cuts unless the economy shows a sharp growth slowdown. Our base case scenario also assumes no further rate cuts at least until the end of 2019. Economic data released this month pointed to a continuing negative impact of the trade conflict on the industrial production, while the consumer sentiment remains resilient. The risk of new sanctions imposed on Turkey after it launched a military operation against Kurds in Northern Syria proved to be short-lived. The ceasefire was achieved, and the Turkish assets have since recovered the loss experienced after the military insurgence was announced. Also in Turkey, the central bank cut the target interest rate by 250 bps on 24 October, making it the third rate cut so far this year, which brought the interest rate down to 14%. The cuts have been justified by decelerating inflation. We keep holding short to moderate duration Turkish corporate bonds in our fund. After a prolonged period of uncertainty, the Israeli pharmaceutical company Teva (Ba2/BB) has finally settled a deal in the opioid crisis on 21 October, agreeing to a cash settlement of 20 million to be paid over 18 years and an additional 25 million worth of addiction treatment drugs. The news had a positive impact on the Teva bonds, which saw an increase in price in the range 4-8% since the beginning of October. The month of October was characterized by increased activity on the primary markets, and we took advantage of some lucrative offers. We acquired 7.5-year USD-denominated new issue of the Chilean energy company Empresa Eléctrica Cochrane (Ba1) at 5.5% YTM, USD-denominated 5-year notes by Celtic Resources Holdings DAC (Ba2/BB), a subsidiary of the Russian gold mining company Nordgold, at 4.125% YTM. We also received an allocation in the new 5.5-year USD-denominated notes of Veon Holdings (BB+/BBB) at 4.0% YTM, in the USD-denominated 10-year Promigas bonds (Baa3/BBB-) new issue at 3.843% yield to maturity and in the USD-denominated 10-year new senior issue of West African Development Bank (Baa1/BBB) at 4.7% YTM, USD-denominated 7-year primary offering of Kuwait Projects (Baa3/BBB) at 4.229% YTM and 5-year Adaro Indonesia (Ba1/BBB), a coal mining company, at 4.5% YTM. The fund closed October with an average yield to maturity of 3.8%, an average duration of 5 years and a leverage position of 5.2%.