Vontobel Fund - Commodity

Transcription

1 Asset Management / Quarterly report - Q3 1/5 Quarterly report - Q3 Asset Management Approved for institutional investors in: AT, CH, DE, ES, FI, GB, IT, LI, LU, NL, NO, SE, SG (professional investors). Market Developments The third quarter can be characterized by the growing tensions surrounding the US - China trade war, but also by how fast the US central bank will normalize their monetary policy and unwind years of ultra-low interest rates. The US economy is running at full steam, showing signs of overheating and rising inflation expectations. US interest rates and global interest rates are rising fast and this introduces the risk that global growth becomes less synchronized. Several (emerging market) economies became dependent upon cheap US dollar funding and are now feeling the stress from tightening credit standards. Similar pressures are building up in the euro zone where investors start to question if the newly elected Italian government can or will dampen their fiscal expenditures to offset any acceleration in fiscal and interest expenses. The oil producing cartel OPEC notices that global oil markets are tightening fast and soon sanctions will kick in targeting Iranian oil exports. Since commodity producers structurally underinvested during the commodities downturn, current (spare) production capacity is exhausted. So even when worries about a global economic slowdown arise, commodities, as measured by the Bloomberg Commodities (BCOM) index returned percent in July, percent in August, percent in September, leading to a quarterly performance of percent. The energy sector continued this year s strong rally driven by mounting supply constraints and solid demand. Brent (+5.21 percent in Q3) and WTI crude (+2.73 percent in Q3) rallied last month on impending sanctions on Iran. Roughly 1.5 million barrels per day (mbpd) of Iran crude exports will disappear and OPEC is concerned that the group won t be able to compensate for production losses for an extended period of time. Heating oil ( percent in Q3) and gasoline ( percent Q3) found support in strong US demand and high US exports. Also the US government denied releasing US crude and product stockpiles from the country s strategic reserves. Though oil markets will see a temporarily increase in Saudi and Russian exports (combined mbpd), severe pipeline constraints in the Permian region are dampening growth in US shale production. Natural gas (+2.34 percent in September, in Q3) increased on forecasts of warmer-than-average temperatures across the US east coast and the effects of hurricane Florence on nuclear power generation on pipeline activity. Three major pipelines that would start to release cheap natural Marcellus gas in September were delayed by over 1 month due to severe flooding. Despite record-high gas production, winter gas prices remain supported by strong demand and tight gas inventories that are still 20 percent below the five-year average for the time this year. Strong production increases in autumn are essential to building up needed storage before the winter starts. The industrial metals sector performed percent (-7.36 percent Q3). Metals faced strong downward pressures when the trade war resulted in the US government raising a 10 percent import tariff on 200 billion US dollars of Chinese imports, ultimately rising to 25 percent by the end of the year. China retaliated by levying tariffs on 60 billion US dollars worth of U.S. goods. Since these actions were highly anticipated and have already prompted a bear market correction for metals in Q3, a relief rally started once final measures were announced. Copper (+5.02 percent) and zinc (+7.63) rebounded strongly last month whilst nickel (-1.79 percent) and aluminium (-2.64 percent) performed negatively. Both metals underperformed on lower growth in China and weakening demand for industrial metals. Chinese steel exports faced headwinds. But zinc and copper inventories at Chinese warehouses dropped sharply and the ensuing backwardated term structure indicates that markets remain undersupplied in Chinese copper demand has been mixed with strong demand from infrastructure investments but weak demand from grid spending. Given the weakness in Chinese macro data, expectations are rising that the Chinese government will soon incentivize more property and infrastructure developments in tier-3 regions. Aluminium is seeing heightened volatility on a potential restart of aluminium smelters in Australia and Brazil, enabling Chinese aluminium smelters to run at higher capacity and offset for the low inventory levels. The precious metals sector declined percent in Q3, leading to a year-to-date performance of percent. Resilient US macro data, a strong US dollar and rising US interest rates explain the underperformance of gold (-5.49 percent in Q3) and silver (-9.74 percent in Q3). Speculative positioning in precious metals reached ultra-bearish levels and introduces the risk of rapid unwinds in case global economic growth collapses or the emerging market crises spreads to Europe. Palladium (off-benchmark but tactically added to the fund) gained percent in Q3, and finds support from steep backwardation and structural tightness in physical supplies. The softs sector remains a clear underperformer by -2.1 percent ( percent in Q3). Coffee markets gained percent last month (down 13.5 percent in Q3) and remain well supplied. Also sugar prices lost ground (-1.2 percent in September, percent in Q3) due to a weakening Brazilian real and fell to multi-decade lows on rising supplies. India, for long times being a net sugar importer, has built large domestic stockpiles and shifts into a net sugar exporter with industry assistance (including a transportation subsidy for exporting 5 million tons of sugar). Speculative positions have reached extreme levels, introducing risks of a short squeeze. An increasing correlation with the Brazilian real could mean that shorts are taken off in both coffee and sugar, particularly when Brazilian elections lead to a business-friendly outcome. Cotton (-7.1 percent in September, -9 percent in Q3) declined amid concerns how trade tensions hit US cotton exports to China (already down by 25 percent quarter on quarter) as well as the USDA raising the outlook for US cotton production. Cocoa reversed from its strong rally in Q1 and performed percent in Q3. Cocoa fell sharply when farmer surveys in Ivory Coast and Ghana and favorable weather pointed to a strong harvest in the two largest coca-producing countries.

2 2/5 Asset Management / Quarterly report - Q3 The grains sector is still feeling downward pressures from the global trade war and constructive harvest progress and lost percent in September (-3.46 percent in Q3). Adverse dry weather conditions in Australia, Russia and Western Europe were offset by favourable yield survey estimates from the US department of agriculture (USDA) in its August grains monitor. Soybeans was the best performing market and increased slightly (+0.24 percent in September) on the back of the USDA raising the outlook for soybean exports by 20 million bushels from last month. Soy oil and soy meal both gained +0.7 percent. Corn declined (-2.4 percent) since strong US exports where offset on expectations of a bumper US crop and the USDA raised US corn production to reach the second-largest crop on record in Despite lower planted areas, record-high yields are visible across all grains. Wheat and Kansas wheat declined the most in September (-6.69 percent, -2.2 percent in Q3) on easing supply concerns and high exports coming from Russia and Ukraine. Fundamentals still look bullish from here with stricter quality controls at Russian ports already start to delay exports and could result in structural export restrictions. US wheat is roughly 25% cheaper than Russian and European wheat and is set to gain back global market share. The livestock sector performed strongly in September (+7.75 percent, Q3) whereby hogs were the best performing commodity(up percent). China is the world s largest pork market and the increasing numbers of swine fever cases across China resulted in severe constraints in domestic transport. Such a situation could lead to a sharp increase in Chinese pork imports. Fruitful trade negotiations between the US and Mexico lead to further growth in US hog exports. Similarly, live cattle (up +5.1 percent in September) and feeder cattle (up percent in September) found strong support from strong exports to Mexico and Asia and profit from the US consumer spending more dollars on meat consumption. Performance Analysis The Commodity Fund (I-share class) underperformed on an absolute and relative basis in September whereas previous months (July and August) saw negative absolute yet positive relative performances. This results in postitive year-to-date absolute and relative performances. Given the strong underperformance in September a more detailed overview is provided on last month s (relative) performance drivers and how the fund changed its active positioning accordingly. The percent underperformance in September can be roughly attributed on a sector level as follows: energy 170 bps, grains -110 bps, metals -30 bps, livestock -80 bps, precious metals +70 bps. The performance attribution can also be split in relative value trading (-128 bps) and curve trading (-210 bps) and again it becomes clear that even though active positions were spread across multiple sectors and multiple dimensions, the fund s diversified investment approach had to deal with a mix of extreme events. In the following, some detailed coloring is provided on those single commodities that contributed most to last month s underperformance: Natural gas detracted -170 bps from performance. Both the underweight and the bearish curve positioning lagged the strong rally observed in natural gas spot prices. Delays of 2 new major pipelines by one month resulted in panic-buying by several utilities. Note these pipelines (once running) will send cheap shale gas to the rest of the US, so this halt let to a temporarily decline in US production and to a locally stressed supply situation in the US Gulf coast. Since the fund trades the US gulf coast contract, it was affected by this local stress in supply and demand. Note that the other US gas hubs did not face this stress and this indicates that over time the typical mean reverting pattern for gas prices will resume. Apart from the supply issue, the hurricane Florence let to an early start of seasonal maintenance for US east coast nuclear reactors. This was also a temporary factor leading to a sudden spike in local gas demand (substitution effect). The third factor that led to a spike in gas demand was the warmer than normal weather pattern in the gulf and east coast. During September and start of October the fund shifted from a bearish positioning to a more bullish positioning in gas that would profit from colder than normal weather in the coming weeks. But once weather risk abates and these new pipelines start to deliver gas at maximum capacity, these new gas flows will become visible in weekly storage injections. In this case, the fund will shift back towards a more bearish pattern. In the long run, the active curve trading in natural gas added +2 percent per annum in relative performances to the fund, but of course, from time to time structurally exploiting this curve risk premium could face very steep drawdowns. These drawdowns are continuously stress tested in our portfolio and typical mean reverting patterns (led by supply, or demand response) and/or substitution (gas to coal, gas to nuclear) lead to a swift recovery in the gas curve. The upcoming roll in gas costs roughly -4 percent, therefore in the long run it makes still sense to absorb some volatility in spot prices and capture this winter risk premium. Another uncorrelated theme that also stress tested the relative performance was the bearish positioning on the lean hog spread curve trade (-73bps). Underweighting front month hogs versus longer dated hogs generated a structural curve premium. However, last month, fears of the Asian swine flu spiling over from China to rest of the world led to some panic-buying of US hog futures. This resulted in a +50 percent rally in short dated hog prices. Also, here the typical mean-reverting and seasonal patterns (led by a supply, or demand response) will lead to a swift recovery. Once there is more evidence on the question if Asian swine flu is under control, there will be a normalresponse to add to bearish curve structures again.roll costs in hogs arenow roughly-15 percent, therefore inthe long run it still make sense to absorb some volatility in spot prices and capture the negative roll premium. The fundamental overweight in wheat contributed -75 bps to performance. The fund ran a structural underweight in the grains and softs sector, that can be explained by strong supplies (US and Latin harvest did not see any weather stress) and limited demand (China imposing tariffs on US beans). As a hedge, the fund added a long position in wheat, since wheat production in Europe and Russia was most affected by warm summer weather and there is a structural concern that the Russian government would impose export restrictions on wheat. However, Russian farmers feared that they would be banned from selling wheat on high international prices and therefore accelerated the exports (again leading to a temporary negative price effect for global wheat prices). In early October, we already see more indications that Russian export ban comes into place. To conclude, the fund continues to run a fully diversified portfolio, where active risk is spread across all commodities sectors. Unfortunately, sometimes it can happen that all markets are stressed at once, correlations spike and our strategy of collecting high carry premiums (roll yield optimization) is tested by volatility in spot prices. The drawdown policy did not protect on the downside last month. Though the specific risk allocation was reduced after each shock, each time a new, uncorrelated event started to test the portfolio and consequently the risk reduction steps were too late. Going forward the fund will increase risk only if correlations between the several factors normalize and we see this validated in our fundamental analysis. A diversified pool of trading themes will exploit the large current

3 3/5 Asset Management / Quarterly report - Q3 market imbalances that are inherent to the current volatile macroeconomic climate. Outlook Trade tensions will most likely further escalate before the US and Chinese administrations reach an agreement. This implies a looming risk of implementation of phase III, where the US imposes a 25 percent tariff on all Chinese imports in Q The US economy is running strongly which strengthens the negotiation power of the US government. Whilst inflation is still moderate and GDP growth is in a percent range, it is no surprise that US nominal and real interest rates further accelerate. The Chinese government, who sees their economy cooling wants to counter-cyclically stimulate credit growth in Q4, now faces the risk of declining exports, imported (commodity) inflation and further currency weakness ahead. In oil markets the question remains what further actions the US government will take to talk down oil prices ahead of the November 6 th mid-term elections. Saudi Arabia (and Russia) are feeling the pressure to pump oil at maximum capacity levels, but this cannot structurally offset the decline in Iranian exports (falling by >1.5 million barrels per day) and or potential shocks in Libyan and Venezuela crude supplies. Indian refiners warned that they cannot replace their 0.4 mbpd Iranian import program and source oil from other producers for the next 3 months. This explains why India urged the US government for temporary waivers for Iranian exports. Strong backwardation in Asian petroleum markets confirms the tightness. Hopefully, the ramp-up in Russian and Saudi oil arrives timely in Q4, sincethe world has never seen such low levels of spare capacity in global oil production. At the London Metal Week both producers and consumers of physical metals indicated to see extremely tight local inventories in China. The big question is if smelters and traders anticipated frictions from the trade war and in response built up their own buffers or if Chinese end demand will accelerate on new infrastructure and housing projects. If these programs do not materialize and the Chinese economy faces more headwinds, metals prices are at risk if trade tensions worsen.

4 4/5 Asset Management / Quarterly report - Q3 Performance in % Net returns Rolling 12-month net returns USD MTD YTD years p.a. 5 years p.a. 10 years p.a. Since inception p.a. Inception Date: Fund Index USD Index: Bloomberg Commodity Index TR Share Class: I ISIN: LU Fund Index Past performance is not a reliable indicator of current or future performance. Performance data does not take into account any commissions and costs charged when shares of the fund are issued and redeemed, if applicable. The return of the fund may go down as well as up due to changes in the rates of exchange between currencies. This marketing document was produced for institutional clients, for distribution in AT,CH,DE,ES,FI,GB,IT,LI,LU,NL,NO,PT,SE,SG(professional investors). This document is for information purposes only and does not constitute an offer, solicitation or recommendation to buy or sell shares of the fund/fund units or any investment instruments, to effect any transactions or to conclude any legal act of any kind whatsoever. Subscriptions of shares of the fund should in any event be made solely on the basis of the fund's current sales prospectus (the Sales Prospectus ), the Key Investor Information Document ( KIID ), its articles of incorporation and the most recent annual and semi-annual report of the fund and after seeking the advice of an independent finance, legal, accounting and tax specialist. This document is directed only at recipients who are institutional clients such as eligible counterparties or professional clients as defined by the Markets in Financial Instruments Directive 2014/65/EC ( MiFID ) or similar regulations in other jurisdictions. In particular, we wish to draw your attention to the following risks: Commodity investments can be very volatile and are prone to sudden swings over the long run. Governments may at times intervene directly in certain commodity markets. These interventions can cause significant swings in the prices of different commodities. Investments in derivatives are often exposed to the risks associated with the underlying markets or financial instruments, as well as issuer risks. Derivatives tend to carry more risk than direct investments. Money market investments are associated with risks of a money market, such as interest rate fluctuations, inflation risk and economic instability. Past performance is not a reliable indicator of current or future performance. Performance data does not take into account any commissions and costs charged when shares of the fund are issued and redeemed, if applicable. The return of the fund may go down as well as up due to changes in rates of exchange between currencies. The value of the money invested in the fund can increase or decrease and there is no guarantee that all or part of your invested capital can be redeemed. Interested parties may obtain the above-mentioned documents free of charge from the authorized distribution agencies and from the offices of the fund at Boulevard de la Foire, L-1528 Luxembourg, the representative in Switzerland: Fonds Services AG, Gotthardstrasse 43, 8022 Zurich, the paying agent in Switzerland: Bank AG, Gotthardstrasse 43, 8022 Zurich, the paying agent in Germany: B. Metzler seel. Sohn & Co. KGaA, Grosse Gallusstrasse 18, Frankfurt/Main, the paying agent in Liechtenstein: Liechtensteinische Landesbank AG, Städtle 44, FL-9490 Vaduz, the paying agent in Austria Erste Bank der oesterreichischen Sparkassen AG, Graben 21, A-1010 Vienna. Refer for more information on the fund to the latest prospectus, annual and semi-annual reports as well as the key investor information documents ( KIID ). These documents may also be downloaded from our website at vontobel.com/am. Please note that certain subfunds are exclusively available to qualified investors in Andorra or Portugal. The KIID is available in Finnish. The KIID is available in Swedish. The KIID is available in Norwegian. The Fund and its subfunds are included in the register of Netherland's Authority for the Financial Markets as mentioned in article 1:107 of the Financial Markets Supervision Act ( Wet op het financie le toezicht ). Refer for more information regarding subscriptions in Italy to the Modulo di Sottoscrizione. For any further information: Asset Management S.A., Milan Branch, Piazza degli Affari 3, Milano, telefono: , clientrelation@vontobel.it. In Spain, funds authorized for distribution are recorded in the register of foreign collective investment companies maintained by the Spanish CNMV (under number 280). The KIID can be obtained in Spanish from Asset Management S.A., Spain Branch, Paseo de la Castellana, 95, Planta 18, E Madrid or electronically from atencionalcliente@vontobel.es. The funds authorized for distribution in the United Kingdom can be viewed in the FCA register under the Scheme Reference Number This information was approved by Asset Management SA, London Branch, which has its registered office at Third Floor, 22 Sackville Street, London W1S 3DN and is authorized by the Commission de Surveillance du Secteur Financier (CSSF) and subject to limited regulation by the Financial Conduct Authority (FCA). Details about the extent of regulation by the FCA are available from Asset Management SA, London Branch, on request. The KIID can be obtained in English from Asset Management SA, London Branch, Third Floor, 22 Sackville Street, London W1S 3DN or downloaded from our website vontobel.com/am. This document is not the result of a financial analysis and therefore the Directives on the Independence of Financial Research of the Swiss Bankers Association are not applicable. Asset Management AG, its affiliates and/or its board of directors, executive management and employees may have or have had interests or positions in, or traded or acted as market maker in relevant securities. Furthermore, such entities or persons may have executed transactions for clients in these instruments or may provide or have provided corporate finance or other services to relevant companies. 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