The Fund ended the month flat, trailing its reference indicator.
The main positive contributors to performance were our long positions on the short end of developed market (German and US) yield curves, as well as bonds in Hungary, Poland and Colombia, and our credit hedges.
However, our external debt strategies weighed on performance, especially our South African hedges and our long positions on Egypt and Argentina.
The impact of our currency portfolio was negative, although it outperformed our reference indicator, mainly due to our long position on the Brazilian real and short position on the Chinese yuan.
In the current environment, with the US economy slowing and developed countries’ central banks starting a rate-cutting cycle, we have increased the Fund’s modified duration to around 4.7.
Our allocation remains balanced between local and external debt.
For the former, we still prefer countries like Mexico and Brazil where real short-term interest rates remain extremely high.
We increased our allocation to local currency debt, especially that of Mexico following the post-election correction, in order to take advantage of the subsequent bounce.
The Fund continues to be long on emerging market debt denominated in hard currencies, especially within the EMEA region and Latin America.
At a foreign exchange level, the Fund reduced its net currency exposure due to the less favourable environment, but remains long on the Brazilian real, Chilean peso and India rupee amongst others.
Latin America | 39.5 % |
Eastern Europe | 23.9 % |
Africa | 19.9 % |
Europe | 6.0 % |
Middle East | 5.9 % |
Asia | 4.8 % |
Total % of bonds | 100.0 % |
Market environment
US inflationary pressure eased a little in June, with the rate falling to 3.3%, but momentum remained strong in the labour market and in services where activity picked up again.
At its FOMC meeting, the US Federal Reserve therefore left its interest rates unchanged, with members predicting a cut by the end of this year.
The ECB knocked 25 bps off its key interest rate at its monthly meeting, but reiterated that any future cuts will be data-dependent.
In China, economic activity is showing signs of weakness, with industrial production and investment both slowing. The real estate sector is in crisis with investment and house prices falling.
Meanwhile, elections in emerging countries such as India, Mexico and South Africa made EM assets highly volatile across the board. However, the situation for a number of them has since improved.
On markets, credit spreads increased by 23 basis points, as reflected in the Itraxx Xover. EM external debt spreads also widened by 11 basis points. However, bonds appreciated with 10-year yields down 10 bps in the United States and 16 bps in Germany.
At a foreign exchange level, the US dollar gained around 1.8% versus the euro, whereas the Mexican peso and Brazilian real, amongst others, suffered isolated mishaps.