Emerging Markets Corporate Debt

Transcription

1 Cumulative Excess Return Return Emerging Markets Corporate Debt Quarterly Review Composite Performance Periods Ending 31 December 2017 At A Glance Inception: 1 September : J.P. Morgan CEMBI Broad Diversified AUM: $ million USD Qtr 4 1 Year 3 Year Since Inception Emerging Markets Corporate Debt Gross of Fees J.P. Morgan CEMBI Broad Diversified Inception date: 1 September Source: FactSet The value of investments can fluctuate. Data assumes reinvestment of dividends and capital gains. Data reflects past performance. Past performance does not guarantee future results. Periods greater than one year have been annualized. Investment Team Margé Karner John Lovito Kevin Akioka, CFA Alessandra Alecci Vice President, Senior Manager Senior Vice President, Senior Manager Vice President, Senior Manager Vice President, Senior Sovereign Analyst Attribution Analysis One Year Ending 31 December Source: FactSet Yield Curve Security Selection Country Allocation Total Effect MARKETING MATERIAL/FOR PROFESSIONAL CLIENTS ONLY/NOT FOR PUBLIC USE

2 Investment Philosophy We believe: Misunderstood and mispriced risks within emerging markets create inefficiencies and anomalies that can be exploited. An active, research-driven, bottom-up approach to evaluate countries and companies combined with robust macro and thematic analysis is the best way to exploit these inefficiencies. A disciplined valuation framework focused on relative value is critical in pricing fundamental risks appropriately. Focus on rigorous risk budgeting and continuous stress testing are integral to achieving strong and consistent risk-adjusted results. Diversified sources of return through active positions in duration, yield curve, country allocation, sector allocation, currency allocation and security selection help generate a more consistent return profile. Goal Seeks to generate an annualized information ratio of 0.75 to 1.00 versus the JPMorgan CEMBI Broad Diversified. Risk Guidelines Duration limits: +/- 2 years versus the benchmark Country exposure: Max 25 in any one country Active risk target: 1.5 to 3.0 versus benchmark Investment Process 1 Top-Down Macro/Thematic Analysis Macro themes Asset class trends Market positioning/technicals 2 Bottom-Up Country/Corporate Analysis Ranking of country credits, currency and rates Fundamental analysis Valuation analysis 3 Construction Risk/reward analysis Security selection Position sizing 4 Stress Testing/Risk Monitoring Volatility/correlations/betas Ensure consistency with broader portfolio MARKETING MATERIAL/FOR PROFESSIONAL CLIENTS ONLY/NOT FOR PUBLIC USE 2

3 Credit Quality Weight vs Credit Quality AAA AA A BBB BB B CCC and Below NR - NA Cash and Cash Equivalents* *Includes Forwards Duration Exposure Weight vs Sector 0-1yr yr yr yr yr Characteristics Effective Duration (yrs) Spread Duration (yrs) Weighted Average Life (yrs) Yield to Maturity MARKETING MATERIAL/FOR PROFESSIONAL CLIENTS ONLY/NOT FOR PUBLIC USE 3

4 Sector Allocation Weight vs. Sector 8.11 Cash & Cash Equivalents* EM Corporate EM Sovereign / Other EM Quasi-Sovereign** Derivatives * Includes FX Forwards **Issues that are 50+ owned or backed by a government are considered Quasi-Sovereign Industry Allocation Weight vs Industry Cash & Cash Equivalents Sovereign Oil & Gas TMT Industrial Pulp & Paper Diversified Common Stock Transport Infrastructure Utilities Consumer Real Estate Metals & Mining Financial *Includes FX Forwards MARKETING MATERIAL/FOR PROFESSIONAL CLIENTS ONLY/NOT FOR PUBLIC USE 4

5 Country Allocation: Top 10 Over/Underweights Weight vs Country China Turkey Indonesia Russia South Africa Argentina Nigeria Chile India Ireland Singapore Thailand Macau Zambia Korea Republic Of Malaysia Saudi Arabia Israel Philippines United Arab Emirates MARKETING MATERIAL/FOR PROFESSIONAL CLIENTS ONLY/NOT FOR PUBLIC USE 5

6 Quarterly Commentary Market Review Emerging markets bonds advanced. Following an early quarter downturn, emerging markets debt recovered and rallied into year-end. The combination of a strong global appetite for risk, improving emerging markets growth rates, stable/higher commodity prices, a weaker U.S. dollar, a flatter U.S. yield curve, and low market volatility drove spreads tighter and returns higher. Emerging markets bonds generally outperformed U.S. bonds. Inflation remained subdued. Despite improving economic growth, global inflation generally remained muted and below central bank targets. The U.K. was a notable exception, as headline inflation climbed to 3.1 in November, a six-year high, before retreating to 3.0 in December. Central banks still supportive. The Federal Reserve (Fed) continued to raise rates, implementing its third rate hike of 2017 in December, but U.S. rates remained relatively low overall. Other developed markets central banks maintained their stimulus programs, while central banks in South Korea and Turkey joined the Fed in gradually removing accommodative monetary policy. U.S. dollar declined. Despite Fed tightening, rising Treasury yields, and improving economic growth, the U.S. dollar continued to weaken versus other major currencies. Risk-on investing and better relative growth prospects outside the U.S. generally weighed on the dollar, which broadly aided emerging markets assets. Emerging markets sovereigns outperformed. Supported by high yield, particularly in Africa and Latin America, external sovereign debt generated solid returns and outperformed external corporate debt. Politics played an important role. South Africa and Chile rallied following market friendly outcomes to their elections, while Mexico was weak given tension around North American Free Trade Agreement (NAFTA) negotiations. Performance Review Defensive positioning detracted. Our defensive positioning and underweight position relative to the index to the lowest credit-quality segments weighed on performance. However, positive selection among securities with BBB, BB, and B credit ratings partially offset the negative allocation effect. Frontier countries delivered mixed results. Regionally, an underweight position in frontier countries detracted, as did an overweight in Turkey. However, an underweight position in the Middle East, particularly Israel, offset some of that effect. South Africa and Greece lifted results. South Africa aided results, supported by favorable election results and expectations for economic reforms. Sovereign bond positions in Greece also contributed, boosted by improving growth and Sector performance varied. Overweight positions in sovereign debt and the oil and gas industry, along with an underweight in the consumer sector, supported performance. Conversely, an underweight position in metals and mining was the largest sector detractor. Sovereign debt contributed. Our exposure to sovereign debt in countries with positive idiosyncratic developments (Argentina, Dominican Republic, Egypt) also supported performance. We seek exposure to sovereign debt where relative value versus corporates is attractive and where we see positive fundamental trends. Positioning for the Future Volatility to normalize. We remain concerned about the unusually low levels of volatility, driven by unexplained market exuberance, as we fear investors have become complacent in recognizing risks. We believe volatility will return to more normal levels as Europe tapers its quantitative easing and the Fed continues to reduce its balance sheet. Risks warrant caution. We believe risks specific to emerging markets include key elections (Brazil, Mexico) and domestic political challenges (Turkey, South Africa). In China, deleveraging and a possible slowdown while rebalancing to a consumption-led economy remain important drivers for commodities and the economic outlooks for many countries. Risks of trade protectionism, including the U.S. potentially exiting NAFTA, could weigh on emerging markets debt. Central bank policy merits attention. We believe the greatest risks to developed and emerging markets include an increase in inflation and a faster-than-expected Fed tightening cycle. Additionally, the unwinding of quantitative efforts also merit monitoring from global investors. Positioning balances risks. We will continue to balance current market dynamics, including unusually high valuations and record-low volatility, with our long-term constructive view on emerging markets debt based on fundamental improvement across countries and companies. However, we selective in the high-yield segment, given the current risk/reward levels. Metals and mining and financials sectors underweighted. We continue to be underweight in high-yield issuers in the metals and mining sector. We are also underweight in financials, mostly in Asia. Increased exposure to Asia, South Africa. We increased exposure to Asia, via investment-grade debt in China, where the reform agenda is supportive for companies in the consumer, technology, and infrastructure sectors. We reduced our overweight to Turkey in favor of South Africa, where our political and economic outlooks are more upbeat. Changing allocations in Latin America. In Latin America, we are underweight in Mexico, as we expect increased volatility in the process of NAFTA negotiations and from the presidential election campaign. We remain overweight in Argentina, due to the continued impact of beneficial economic reforms and better-than-expected fiscal performance. MARKETING MATERIAL/FOR PROFESSIONAL CLIENTS ONLY/NOT FOR PUBLIC USE 6

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Sector weights, portfolio characteristics and holdings are of a representative account in the composite. Holdings are current as of the date indicated, are subject to change and may not reflect the portfolio's current holdings. construction guidelines document operational policies and not necessarily investment restrictions imposed on management of the strategy. Material presented has been derived from industry sources considered to be reliable, but their accuracy and completeness cannot be guaranteed. Opinions expressed are those of the portfolio investment team and are no guarantee of the future performance of any portfolio. Nothing in this document should be construed as offering investment advice. Please note that this is for informational purposes only and does not take into account whether an investment is suitable or appropriate for a specific investor. For purposes of compliance with the Global Investment Performance Standards (GIPS with the Global Investment Performance Standards (GIPS ). Emerging Markets Corporate Debt composite invests in investment grade and high-yield corporate debt and derivative securities in U.S. dollar and local emerging markets-denominated currency. Index futures (and currency forwards and futures, where applicable or appropriate) are occasionally used to equitize cash and manage portfolio risk. Other derivative instruments may be used, as allowed, as part of the investment strategy. Returns are calculated and stated in U.S. dollars. The return may increase or decrease as a result of currency fluctuations. Returns for periods less than one year are not annualized. 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