Central Banks move ahead with rate cuts, but growth concerns remain

8 October 2019

Ani Deshmukh

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

September was characterized by parallel moves by the ECB and the Fed, both cutting rates in line with expectations. However, the Fed’s rate cut was accompanied by less dovish comments, while weaker-than-expected PMI and growth numbers from the Eurozone (Germany in particular) resulted in renewed worries about global growth. The mid-month attack on Saudi Arabia’s largest oil refinery heightened geopolitical risks, and an increasingly fractious parliament in the UK meant that a no-deal Brexit remains likely. Risk markets were largely range-bound for most of September, with Asian equities moving within a 2% range barring Hong Kong, which was weaker due to ongoing protests. U.S. rates sold off from end-August levels, widening to 1.88% mid-month both due to higher UST supply as well as a reversal of the extreme positioning reached in August. While USTs rallied into the month-end due to weaker macro sentiment, the 10-yr USTs still widened by about 14bps in September. Credit spreads were modestly weaker (2-3bps in IG, and 25c in HY) in Asia.

Outlook and Fund Positioning

The recent drivers for risk assets namely; rates outlook, the pace of growth in DM, the U.S.-China tariff wars and geopolitical risks, all remain relevant drivers for EM and for Asia Credit in the fourth quarter. We continue to believe that rates will be range-bound, especially on the long end. While the Fed is likely to support the economy with another rate cut in Q4, the long end is unlikely to react materially given the curve inversion. Increasing political risks in the U.S. with the Trump impeachment inquiry and the Brexit deadline will likely keep uncertainty levels high. However, the more secular theme of lower rates amidst slowing growth remains intact, which is likely to make credit a favored asset class. Political risks are difficult to price in, and the best defense against an uncertain outlook is to remain invested in high quality debt instruments and companies that are defensive.

The RAM Asia Bond Total Return Fund’s returns were -0.18% in September, in line with the index. The Fund’s lowering of duration helped reduce the impact of the UST sell-off, and we used that as an opportunity to add Investment Grade risk back to the portfolio later in the month. The Fund is 97% invested with a duration of 4.2yrs, and we would look to manage duration actively in the current volatile UST environment. New issue activity will remain high as corporates look to lock in cheaper borrowing costs, affording us the opportunity to rebalance the portfolio if required.

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