10 February 2022
Increase the speed
RAM Global Bond Total Return Fund
Most financial assets suffered losses in January. Government bonds yields went up, while credit spreads widened. For once, US equities underperformed Europe and EM equities, but all printed negative performance.
There are indeed several explanations to this synchronized move downwards. Last year saw a remarkable performance for most of these assets, and a correction is not a surprise, particularly as earnings expectations are quite elevated.
From a top-down point of view, the outlook this year is more complicated, especially with inflation levels significantly above central banks objectives, which generally stands around 2% over the long term. This situation encourages them to increase the speed at which they intend to turn their monetary policy from being accommodative to more neutral, eventually somewhat restrictive later if needed.
Consequently, on top of economic data volatility, the potential faster normalization should generate a higher volatility environment for equities and credit spreads, as real yields and nominal yields adjust to this new policy framework, especially as growth is no longer stimulated as last year.
We have decreased our overall duration by lowering it further in USD, and kept it low in EUR. We have slightly increased it only in CNY, as nominal and real yields remain attractive. We continued to sell bonds that looks rich to increase the liquidity of the portfolio. With spreads tight at the beginning of the month, we closed our long in Euro High Yield, and reduced the US IG. As spreads widened at the end of the month, we sold some protection in US HY. Overall, our total Sub investment grade exposure was lowered at 9% after these moves. Our duration hedge in USD and EUR contributed positively, but with rates higher and spreads wider, our traditional portfolio detracted -0.87% (gross of fees)
Our long Austria 100yr vs Germany 30y outperformed, as well as the Asset swap in USD this month. With curves flatter, our USD and EUR long end steepeners underperformed, and remain close to historical lows, particularly considering where we are in the normalization process. Our non-traditional portfolio delivered +0.02% (gross of fees)
As the euro remained weak in January, we reduced our short by 1%. Our remaining EUR short is against the SEK and NOK exposure combined. We reduced further our RUB exposure due to the geopolitical risk. Our FX portfolio delivered -0.01% (gross of fees). The duration stood at 2.25 years and the average credit quality was A+.
RAM Asian Bond Total Return Fund
Have the Rules Changed:
After a volatile 2021 for US interest rates and Asia credit specifically, most came in thinking the worst was behind us. As you saw in our own funds positioning, we remained very cautious (expressed through cash, duration and IG/HY composition.) This view was driven by anticipated rises in interest rates (inflation-driven), volatility and the unclear China HY property path.
2022 began with a challenging backdrop indeed. The year has been led by global bond yields spiking and curves bear flattening, with high inflation (eg. US Dec CPI +7.0% YoY), increasing oil prices (WTI +15%), hawkish FOMC rhetoric and a generic shallow re-pricing of risk assets. Chinese Government Bonds were the exception to the global bond market rout after the PBOC cut rates and signaled more easing is to come. The USD had an explosive start to the year with a strong rally as well. At the heart of the move was Powell’s perhaps startling Q&A post-FED meeting. Should we expect more fireworks in week 1 of February, from the BoE, ECB and RBA? We suspect so. The main question the market is left ruminating at the end of January is whether the rules have changed. Will market participants and, as a corollary, asset valuations begin to question whether we are in a new interest rate/central bank paradigm? What does that mean for volatility, credit spreads and asset prices in the near-term? Better entry points are likely in the coming weeks/months for risky assets.
In Asian credit, similar to the US credit market, both IG and HY widened and performance was additionally negative due to the move in UST. The month began strongly as Omicron concerns dissipated. Growing concerns, though, around Shimao and other Chinese property companies arrested this rally quickly and credit spreads, specifically in HY, were significantly higher by mid-month. PBOC action and some perceived signs of potential easing of policy from the powers that be, catalyzed a rally but the move in interest rates, curves, risk assets and global credit, then began to weigh on the broader Asia credit asset class. This led to a poor return for the JACI of -2.2% in January 2022. This performance was driven by both interest rates and credit spreads.
Outlook and portfolio performance:
On spread levels, the relative value continues to remain in Asia credit both in IG and HY but trajectory in the China property sector, needs to still be continued to be monitored. Again, similar to last year, developments in China policy will be a key driver of opportunities. We still remain cautious due to the policy uncertainty both in China and globally.
We started the year very cautiously positioned due to the continued uncertainty in the China property sector, COVID challenges persisting and importantly, what we saw as the possibility for a sharp move higher in interest rates to start the year (real yields were very telling.) For January, this was the appropriate stance. We continue to wait for more clarity to change the risk profile of the fund. The fund remains well diversified. We remain flexibly invested with a net duration of 3.1 years and 16.5% cash levels, and we would look to rotate out of cash and tightly traded Investment Grade bonds into new issues or HY/China property on stabilisation and at some time add duration.
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