Conflicting signals amid rich valuations

6 December 2019

Gilles Pradère

RAM (Lux) Tactical Funds - Global Bond Total Return fund - Gilles Pradère Senior Fund Manager, Fixed Income

November saw risk assets outperform in developed economies: equities benefitted from hope of declining political and economic risk, and credit spreads remained relatively well oriented in this environment, allowing a moderate outperformance. Conversely, Emerging assets have been hurt by various political events, without derailing the general risk-on tone. Consequently, yields of safe assets continued to push moderately higher, implying an underperformance this month. 

Investors have had to cope with conflicting signals recently. With lower risks on Brexit and a potential interim trade deal, the stabilization of some leading economic indicators and potential increased fiscal spending in Europe give hope of a classical mid-cycle improvement. But growth remain fragile and below potential, leaving the economy vulnerable to potential negative shocks. For now, the fiscal impulse is relatively limited, and combined with low inflation, this should prevent a sharp backup in yields. Moreover, political risks can resurface quickly.

With valuations relatively rich, we have booked some profits on spreads that have performed well, reducing our duration and allocation to crossover investments. This helped mitigate some underperformance of our remaining peripheral exposure, reduced the prior month as we booked profits on Greece. Our Treasuries exposure detracted but is consistent with our choice to keep some quality within the portfolio. Our traditional portfolio delivered -0.32% (gross of fees)

The U.S. curve, US asset swaps and spread of Austria vs Germany contributed positively while our Spain vs France exposure suffered from the pullback following the election results. Our non-traditional portfolio delivered -0.03% (gross of fees)

Our SEK and NOK exposures against Euro contributed positively. We booked profits on our EM basket, but remain overall with a moderate USD short bias against various EM high yielders. Our Fx portfolio delivered +0.02% (gross of fees)

At the end of the month, the RAM (Lux) Tactical Funds – Global Bond Total Return Fund (Class B USD) delivered -0.37% net of fees. Duration stands at 3.8 years and the average credit quality was A+.

 *Sources : RAM Active Investments