Renewed optimism benefits emerging markets
We noted only relatively small changes for emerging-market credit as a whole in March, and the Carnegie Emerging Markets Corporate Bond fund slipped 0.01 percent.
As expected, the US Federal Reserve decided to implement this year’s first rate hike in mid-March, upping the policy rate by 0.25 percentage points. Meanwhile, there was a softening in the rise of US long-term interest rates, which may at least partially be explained by uncertainty surrounding President Trump’s ability to push through reforms meant to stimulate the domestic economy.
Early in the month there were relatively large outflows from US high yield, and credit spreads diverged somewhat.
The month has generally been relatively quiet in terms of portfolio activity, and we made no major changes. We have continued to reduce our exposure to Mexico, and sold a stake in the country’s leading bank, BBVA Bancomer.
There have certainly been a lot of new issues during the month, but since many of these come with tight credit spreads we are being quite selective as to which transactions we want to be involved in. From these levels we believe it is challenging to get a payback for a general tightening of the market, making the selection itself, choosing the right credit, even more critical to positive performance.
Things look generally good for many emerging markets, and a number of countries are benefitting from reforms and renewed optimism. There is also the expectation that fewer companies in emerging markets will become insolvent in 2017 than last year, and in recent quarters we have seen a slowdown in the number of downgrades set against the number of upgrades from the leading rating institutions. This should then be considered against the fact that the market at large has priced in this trend.
Emerging Markets Corporate Bond continues to maintain a balanced portfolio in terms of credit risk, interest rate risk and geographical spread. Our ambition is to achieve positive returns while maintaining relatively low portfolio volatility.