Divergent trends in November

14 December 2018

Ani Deshmukh

RAM Active Investments RAM (Lux) Tactical Funds II - Asia Bond Total Return


Asia vs EM spreads have converged


Credit markets saw continued weakness in November, as outflows after October’s selloff resulted in redemption-led pressure across both IG and HY segments in Asia. Two key macro factors affected markets; the Fed’s rate rhetoric and the oil price trajectory (which underwent a directional shift). Brent oil prices dropped 22% in November, as U.S. supply reached record highs, forcing the OPEC to consider production cuts. The precipitous decline in oil prices gave Asian oil importing countries some breathing room as currencies recovered. U.S. interest rates also declined as USTs rallied after the Fed signaled a more data-dependent hike path, while also indicating that rates are approaching the neutral policy band. These comments resulting in 10-yr treasuries rallying by 17bps in the month, ending at 2.99%. Index performance was mixed, with the JACI up +0.42% pretty much entirely due its longer duration, on the back of U.S. Treasury yield moves. Interestingly, the last two days of the month generated half of the index’s monthly returns.

The RAM (Lux) Tactical Funds II - Asia Bond Total Return Fund (Class PI USD net of fees) was up 0.05%* in December. The bull flattening in U.S. treasuries had a more modest impact on our portfolio relative to the index, given our shorter duration (2.4yrs vs 4.3yrs). Our views on U.S. rates have not changed materially; we believe that the Fed would hike rates in December 2018 and at least twice more in 2019. The Fed’s recent comments have changed the dot plots in 2020 and 2021, but the 2019 narrative remains on track given low inflation and a tight labor market. Given the likelihood of a U.S. recession remains low, we do not expect the yield curve to invert meaningfully and therefore 10yr treasury rates are also likely to widen in 2019 to keep pace with the Fed’s hikes. While peak rates may not reach 4%, we view the current levels of 3% (or below) as at the low end of the range. Our portfolio continues to be defensively positioned (duration-wise) and is c.95% invested currently. We remain focused on identifying value in the higher quality credit space in Asia, and potentially increasing duration in 1Q as we approach the end of the Fed’s hike cycle.

Nexus Investment Advisors Limited, subject to the supervision of the Securities and Futures Commission (SFC) in Hong Kong, has been appointed by the fund's management company as investment manager to RAM (Lux) Tactical Funds II - Asia Bond Total Return Fund.

*Sources : Nexus Investment Advisors Limited