Alma Gramercy Emerging Markets Debt

Market Review and Outlook

August was a tumultuous month for markets as treasury volatility reared its ugly head again. The sell off in US Treasuries was fast and furious with 10 and 30-year Treasuries selling off 22bps and 28bps, respectively, during just the first week of the month. This move was driven by the release of the US government’s fiscal plan which showed much higher than expected financing needs, increasing fears over future UST supply, and coincided with Fitch’s downgrade of US sovereign debt from AAA to AA+. While a softer than expected July jobs report provided a short reprieve, 10 and 30-year Treasuries continued their climb higher, reaching levels not seen in fourteen years (4.3% and 4.4%, respectively), as the market remained concerned over (1) Japanese demand for US Treasuries post the BOJ’s tweak in Yield Curve Control policies, (2) stronger economic data signaling a push out of recession risks and reinforcing the higher for longer rates narrative and (3) concerns over upside risks to inflation on the back of rising commodity prices driven by supply side factors. Oil prices, in particular, as measured by the WTI index rose almost 16% in July and another 3% in August to end at a year-to-date highs $83.6. The Treasury market finally took a breather towards the end of the month on the back of soft PMIs in the US, EU and the UK and 10 and 30-year Treasuries rallied to end the month only 15 and 22bps wider on the month. Nonetheless, given the significant US Treasury volatility and mounting concerns over weakening Chinese demand and stalling growth prospects, risk assets were negatively impacted in August. In this context, the JPM Equal
Weight Index returned -1.55% in August while the Fund returned -2.22% (I USD ACC).

In terms of return streams, EM corporates outperformed in August with the CEMBI Broad Diversified down only 0.6% on the back of its low duration (only 4.8 years). EM local sovereigns underperformed with the GBI-Broad diversified index down 4.2% as the US Dollar strengthened significantly on the back of higher rates expectations in the US. EM Hard Currency Sovereigns performed better than EM Local Sovereigns with the EMBI Global Diversified (EMBIGD) index losing only 2.1% in August but still worse than EM corporates given higher duration of 6.2 years. On a total return basis, the high yield component of the EMBIGD index outperformed the IG component by 20bps during the month mostly due to the duration differential (4.9 vs 8.3 years). The same was observed in the corporate space with HY outperforming IG by 90bps on a total return basis.

Performance for the Fund during the month of August was driven by the fund’s positioning in local markets, which underperformed on the back of US Treasury volatility and higher for longer US rates expectations despite key EM Central Banks having started to embark on their rate cutting cycle and continuing to provide very attractive carry. Our exposure to the distressed China property space was also a detractor this month as sentiment turned more negative on Chinese growth prospects. Nonetheless, we believe the balance of risks in China remain skewed to the upside with more policy support forthcoming as the government looks to meet its internal targets. These factors were partially offset by our overweight allocation to high yield EM
corporates, which proved to be resilient during the month of August