Commentaries

Chinese origins, Japanese medicine

9 April 2020

Gilles Pradère

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


In March, financial markets reacted with violence to the concerning newsflow about the Coronavirus. Both equities and credit underperformed, and only DM Government bonds delivered a positive performance.

The global lockdown, the only sanitary answer available to limit the spread of the disease, is unprecedented. Most of the world’s economy runs at about one third of its capacity, and the US just entered their lockdown. The impact on corporate income and government receipts will be massive. Even if the lockdown duration is uncertain, China’s economy slowed sharply for the last two months and is not yet back to normal levels.
The economic answer to this unprecedented deflationary situation is also extraordinary and follows the Bank of Japan’s method of Zero Interest Rate Policy combined with large amounts of assets buying. For the time being, Government and Investment Grade corporate bonds are targeted by the Fed and the ECB to support the economy, but with a large deficit to be funded and stress on corporate balance sheets to continue, more interventions could be on the table to avoid a depression.
Meanwhile, this extreme repricing creates harm, but conversely opportunities, with a focus on sectors that will be, at least to some degree, supported.

Our US Treasuries exposure benefitted: we remain long but manage it tactically as we expect some volatility. Invested in Sovereign and diversified, our EM exposure suffered as all spreads widened sharply, but at its current value it remains attractive, and we will keep it. With no corporate exposure, levels reached on strong investment grade names are an opportunity, and the position contributed positively as we increased it. Our traditional portfolio delivered -2.25% (gross of fees).

We booked profits on the curve steepener as deflationary risk remained high. We also booked profit on US treasuries against swaps as we expect more issuance. We reduced Spain vs France and kept Austria vs Germany. Our non-traditional portfolio delivered +0.16.

At the beginning of the month, we closed the RUB and MXN exposures, and reduced the EM basket, as those currencies held well despite signs of stress. We reduced the PLN, which held relatively well against EUR, and increased the NOK after it cheapened dramatically. Our Fx portfolio delivered –0.28%.

At the end of the month, the RAM (Lux) Tactical Funds – Global Bond Total Return Fund (Class B USD) delivered -2.45% net of fees. Duration stood at 4.75 years and the average credit quality was A.

*Source: RAM Active Investments