A beautiful summer clouded by trade war escalation

In July, the trade war between the US and China escalated, resulting in the CNY falling to a 12mth low. During the month, the EU finalised a trade agreement with the US. At the same time, Turkey’s central bank refrained from raising rates, spreading risk concerns to Emerging Markets.

Fund Commentary
22 Aug 2018

In July, the trade war between the US and China escalated, resulting in the CNY falling to a 12mth low. During the month, the EU finalised a trade agreement with the US. At the same time, Turkey’s central bank refrained from raising rates, spreading risk concerns to Emerging Markets.

During the month, President Donald Trump made unusual comments about the Fed’s monetary policy, suggesting that the pace of normalisation was “taking away our big competitive edge”. In front of the Senate Banking Committee, the Fed’s Chairman Jerome Powell was confident regarding the strength of the US economy, generated by an appropriate monetary policy which supported activity and hiring. He pointed out that the stimulation of a lackluster wage growth is not part of the Fed’s responsibilities.

Thanks to consumer spending, the US economy accelerated in the second quarter, with GDP growth expanding at an annual pace of 4.1%, its fastest since 2014.

In Europe, the ECB left interest rates unchanged. After the ECB’s decision to halt its QE program in December, Mr. Draghi didn’t deliver any guidance on his bond reinvestment policy, with the matter not having been discussed at the policy meeting. European cyclical indicators have followed a softer patch since the beginning of the year, with the composite PMI unable to reiterate its June bounce.

During the month, a strong set of US data and reports that core central banks may pull back from accommodative monetary policies (which have so far supported risky assets), put pressure on government bond prices, with the 10yr US Treasury reaching levels close to 3%, 0.45% for the Bund respectively. In Emerging Markets, local and hard currency debts performed well as the spread tightened from a recently wider level and the S&P posted new highs. Argentina and Turkey remained the “chain’s weak links” due to their reliance on external debt financing and a lack of confidence in their respective monetary policy measures.

After its recent strength, the dollar stabilised (trading within a range of 94/95) and, combined with valuations and favourable technical factors, lead to a reduction of outflows into EM funds and ETFs.

During the coming weeks, the markets will wonder if trade tensions will take the lead over global growth improvements and reassess the potential impact on the monetary policies of the main Central Banks.


During the month, the Investment Adviser implemented the first stage of the Fund’s new strategy. In order to optimise the risk/return profile, all FRN positions and most issues with negative yields were sold with cash proceeds allocated to the following sub-fixed income segments and issuers:

  • Emerging Markets: Gazprom 26, Bharti 21, Codelco 24, Indonesia 25, Romania 28
  • High Yield Crossover: Faurecia 25
  • Subordinated Financials: Santander 25
  • Hybrids Corporates: EDF Perp 22, Telefonica Perp 23, Total Perp 26, VW Perp 27
  • Investment Grade: CEZ 28, Mondelez 27, Ar celorMittal 23

As a result, the modified duration increased from 1.7 to 3.2 during the month. In terms of portfolio diversification, the Fund held 31 issues from 31 issuers.


This month, the Investment Adviser reduced the Fund’s exposure to 10yr and 30yr Treasuries in order to slightly decrease duration. The barbell strategy remained in place, with the modified duration decreasing from around 5.8 to 5.4. In terms of portfolio diversification, the Fund held 25 issues from 22 different issuers.


During the month, the Investment Adviser bought a new position in Gazprom 2034 in order to increase the carry and reestablish an exposure to the main “Russia-Proxy”. Russia and its main corporates may remain under pressure as new sanction risks remain, but should be in a position to face difficulties given solid fundamentals. Further to the new position, the Fund’s modified duration increased from below 5 to 5.3. In terms of portfolio diversification, the Fund held 33 issues from 33 issuers.


The Investment Adviser’s outlook is tied to two major topics, inflation and the positions adopted by Central Banks. Inflation risk remains subdued and the US yield curve continues to flatten. Combined with other topics such as an escalation of the risk of war, these factors suggest that recession fears will rapidly become a major concern. In addition, after the recent correction within Emerging Markets and the European periphery, the team is still convinced that high quality bonds, considered as safe havens, will attract more investors during the coming months.

In the US market, the Investment Adviser thinks that long US Treasuries are still attractive, believing that they could be a top performing asset class in the second half of 2018 and that an inverted slope of the curve is not excluded at the end of the year. According to the team, the Fed may be doing wrong by pursuing the normalisation of monetary policy, with the markets not having the capacity to absorb additional rate hikes. The Investment Adviser thinks that the best strategy at the moment is to invest in both, floating rate notes (FRNs), as the 3 month Libor dollar is already above 2.30% and short term corporate bonds yielding 3% and above, combined with 30y US Treasuries.

In Europe, the Investment Adviser thinks that the Bund will match the behaviour of US Treasuries and, in addition, will perform well in case of any resurgence of tensions in the periphery, in Italy in particular.

Within Emerging Markets, the Investment Adviser will continue to closely monitor the behaviour of spreads (both governments and corporates) and increasing volatility due to global risk aversion. With increased performance dispersion, the team thinks that high-quality Emerging debt still offers a very attractive riskreward profile, in particular after the recent spread widening, and continues to benefit from both attractive valuations and encouraging technical factors.

In conclusion, the Investment Adviser still believes that the best performing asset class will be long-dated US Treasuries, and expects the curve to continue to flatten during the second half of the year. According to the team, Emerging Markets will probably stay volatile during the summer. If either trade or rate concerns ease, current levels offer an attractive opportunity to invest in high-quality EM markets in the Investment Adviser’s opinion.

The views and statements contained herein are those of the Eric Sturdza Banking Group in their capacity as Investment Advisers to the Fund as of 14/08/18 and are based on internal research and modelling. For detailed performance information based on complete 12-month periods since inception, please refer to the funds factsheets, which are obtainable from https://eisturdza.com/funds/fund-documents.