Volume 1 Issue 5, September
After a strong run of emerging market performance, aggregate developed markets solidly outperformed EMs, mainly through avoidance of downside. There was quite a lot of variation in performance, however. Egypt (+7.6%) and Argentina (+7.0%) were the strongest markets among EM, while among DMs Germany (+5.4%) and Ireland (+5.7%) posted sharp gains. At the other end of the spectrum, Turkey (-9.6%), Greece (-7.9%) and South Africa (-6.0%) were the worst performing EMs while the weakest DMs were little changed (Singapore -1.3%, Australia -93bp) in the month.
Global Fixed Income
10-year bonds in Nigeria (-89bp), Portugal (-44bp) and Brazil (-28bp) showed the biggest gains, while India (+33bp), Turkey (+33bp) and UK (+31bp) fell the most. Rates across all countries stayed in fairly narrow ranges but were higher in large markets such as the US (+17bp), Japan (+7bp) and Germany (+8bp).
Americas The Bank of Canada surprised many by hiking its benchmark interest rate by 25bp to 1%. Hurricane Irma caused widespread damage in the Caribbean but weakened before hitting Florida in the US. Trump reached an agreement with his opposition in Congress to raise the US government’s debt ceiling. Official US August CPI increased more quickly than in July and stood at 1.9% y/y. The Fed at its FOMC meeting, held rates steady but announced (as largely expected) that it would begin reducing its $4.5 billion balance sheet. A major earthquake hit Mexico and caused heavy damage in the capital.
EMEA The ECB held rates steady at its monetary policy committee meeting but raised its growth outlook slightly. The BoE also held rates steady at 0.25%. As a confirmation of Europe’s low rate environment and the yield-chasing it has encouraged, Austria issued a 100-year bond at around 2%. The bond which will be one of the highest duration securities in history, was 3x oversubscribed. Germany held their federal elections and Angela Merkel’s ruling CDU party lost seats, forcing it to create a coalition although it was initially not clear with which other parties.
Asia North Korea conducted a test of its largest nuclear device thus far. This followed a series of missile launches last month and further ratcheted up tensions among regional powers. The UN responded by approving additional sanctions on the DPRK. Significantly, China took some of its first steps to pressure North Korea, when its five largest banks restricted the opening of new accounts of North Korean individuals and companies. Most likely in response to recent months of renminbi strength, the PBOC eliminated a reserve requirement on banks’ short yuan positions for clients, causing the CNY to drop. S&P followed Moody’s May downgrade by lowering China’s long term sovereign rating from AA- to A+. The BoJ held rates steady at 0.1% during their policy meeting.
Crude oil had a strong month and rose to the $50 level. There was a short-term spike after a vote on Iraqi Kurdish independence. Gold was weaker and fell below the $1300 level. Demand for real assets and base metals was sluggish as US stock markets once again hit all-time highs in the month, fixed income was relatively stable and China’s credit and growth outlook are still a bit murky–copper and global real estate indices fell during the month.
Not surprisingly positive and negative equity performance were driven by the DM/EM asset class allocation. Largest equity portfolio contributers were the US (+48bp), the UK (+15bp) and Germany (+14bp) while Turkey (-16bp), Greece (-13bp) and South Africa (-10bp) weighed the most on performance. The bond portfolio was mixed across DM/EM and EMs performed relatively better. The US (-45bp) India (-8bp) and the UK (-7bp) were the largest detractors, with Indonesia (+3bp) Brazil (+6bp) and Nigeria (+6bp) adding smaller but positive performance to the fixed income portfolio.
Comparative Year-to-Date performance: