Commentaries

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12 June 2019

Ani Deshmukh


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

May was characterized by a marked increase in trade tensions between the US and China, which later spilled over to Mexico and India trade differences, all leading to higher tariffs for exports into the U.S. Expectations of a US-China trade accord unraveled in early May, as last-minute differences in key trade demands derailed the discussion. Last month also saw an increase in geopolitical risks between the U.S. and Iran, and UK PM Theresa May resigning, putting the Brexit process and timelines into uncertainty. All having a sobering effect on the markets. Equities, currencies and credit all weakened in response, but the most visible impact came from the UST yield curves, with the 10-yr yields collapsing 35bps to end at 2.12%, with the 3mth-10yr spread at -26bps, the steepest inversion since March 2007, and markets now pricing in a 95% probability of a rate cut by October. Overall risk positioning remains defensive and is likely to stay unchanged until macro trade concerns abate.

The US-China trade discussions remain the fulcrum on which market sentiment depends, as this is the largest bilateral trade relationship globally. China is also continuing to implement market-based reforms domestically and has thus far resisted the temptation to flood the system with liquidity. Resolution of Geopolitical issues are difficult to predict, and therefore we choose to focus on fundamentals and position the portfolio accordingly. Asian credit markets are deep and differentiated, with most of the Investment Grade and higher rated High Yield corporates and banks comprised of strong credits. Weaker, regional companies are likely to see more volatility and we have selectively avoided going down the credit spectrum.

Our Fund’s duration has increased to 4.5 years (versus 2.6 years in Dec 2018) and is 97% invested with a current yield of 4.8%. Investment grade bonds account for 74% of the portfolio. We have also kept our China exposure relatively stable (c.35%), versus over 50% in most indices, to improve diversification and cushion returns. As valuations improve, we would look to selectively add risk.

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