A Dose of Japanese medicine

15 May 2020

Gilles Pradère

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

Risk assets rebounded in April, with equities and high yield off their lows but with a year-to-date performance still deeply negative, while global rates stayed low.

The combined efforts by central banks and governments to avoid an economic collapse draws parallels with the Japanese medicine of large fiscal deficits funded mostly by the central bank. The size of the US fiscal package and the speed at which the Fed purchased assets was impressive. The answer provided by European authorities for the time being is less aggressive, and it looks like the ECB plans several months to fully deploy its large buying program. In order to effectively ease financial conditions, they will likely have to increase the pace. So, even if support is on its way, the economic situation remains daunting and as Chairman Powell said, “there will likely be a need to do more”.

We tactically closed our US Treasuries exposure as yields moved close to 0.30% in the 5y area. Our investment grade corporate exposure, built since mid-March, benefitted and we took advantage of new issuance and wide spreads to invest in sectors like technology or food, usually very expensive due to strong balance sheets. With an ECB less effective than the Fed, we reduced our peripheral exposure by selling our 2-year Italy, while we kept our exposure on Greece 7-year and started to book profits on various European corporates following a strong performance. We have kept our diversified emerging debt exposure broadly unchanged as there is a decent value embedded, included on robust countries like Israel and Korea. We have also added some Canadian provinces in CAD in the 5year area as they offer both quality and liquidity. Our traditional portfolio delivered +1.86% (gross of fees).

We kept our long Austria against Germany, which performed slightly, while our remaining Spain against France detracted slightly. Our non-traditional portfolio delivered +0.01% (gross of fees).

 Our long SEK and NOK against Euro performed this month, notably after the Swedish Central Bank argued that negative rates are not an appropriate solution to the current situation. NOK continued to recover, and we kept the Nordics exposure unchanged. With a better tone overall, the EM basket recovered. Our Fx portfolio delivered +0.15% (gross of fees)

 At the end of the month, the RAM (Lux) Tactical Funds – Global Bond Total Return Fund (Class B USD) delivered 1.98% net of fees. Duration stood at 4.4 years and the average credit quality was A-.

*Source: RAM Active Investments