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Christmas can’t come any sooner for the bond investor

Photo: Shutterstock

Photo: Shutterstock

My colleague, a fellow portfolio manager, and I had been monitoring price developments in great detail during the final two weeks of October, and when the final net asset value of the funds we manage were issued late last week, we both looked at each other and hoped it was December and not October.

Not that we are great fanatics of the festive season, but the performance we have managed to register so far in 2017 is by far superior to what we had bargained for at the beginning of the year.

So we would gladly close off 2017 with the gains we have clocked in till the end of October. But there are two months left to go for the year to end, and it is highly imperative to protect what has been achieved so far.

Easier said than done, especially if everyone in our situation would be reasoning out in the exact same way. The funds we manage are primarily fixed income based.

Our main focus is on high yield markets, notably European and US high yield, but we also inevitably monitor developments in the European and US sovereign bond market.

Sovereign bonds are particularly important as they are the gauge of the state of the respective economies, in terms of GDP growth, inflation, central bank monetary policy, risk aversion in the markets, not to mention that they are also impacted by movements in the FX market.

Over the past couple of years, we have dedicated a large deal of our time and resources focusing on emerging market economies, which, in 2016 and 2017 have been the leaders (in terms of performance) within the fixed income asset class.

Following the sharp correction in EM bonds in February 2016, all the conditions were optimal to render EM credit a reliable alternative to the higher yielding fixed income segments, such as European and US High yield markets.

Valuations had become way too cheap, their economies benefitted with the ever weakening US Dollar, demographics remain highly in their favour, and more importantly, central banks and governments in EM economies had taken investor friendly measures in ensuring the continuous flow of monies in EM credit.

All these key factors, among many others, have been the main ingredients to the success of Emerging Markets. Trade has benefitted. The region’s major industries flourished.

Corporations became more efficient and boasted healthier balance sheets, and, from an investor’s point of view, the risk-return trade off from an EM investment was well warranted, especially given the fact that the European and US high yield markets were perceived as expensive. Whoever built meaningful exposures to EM over the past 18 months or so has been rewarded, handsomely I would say.

And whilst, yes, given the run bond markets have had overall, one might get carried away and be tempted to begin taking profits, and begin to wonder whether this rally is sustainable or not, there does not seem to be anything which could possibly derail this momentum.

Q417’s key central bank meetings are out of the way, and have been investor-benign to say the least. Earnings season has passed the half-way mark, and from this point till year end the greatest trade-off is whether to realise gains and see off the final stretch of the year with no worries, or hang in there a bit further and risk seeing the performance of 2017 gnawed at.

I would not rush into exiting the market (credit markets in general), as spreads, despite being at ultra-tight levels, show no signs of retreating, and hence the carry trade will be of paramount importance for the remainder of 2017.

Disclaimer: This article was issued by Mark Vella, Investment Manager at Calamatta Cuschieri. For more information visit, www.cc.com.mt. The information, view and opinions provided in this article is being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice. Calamatta Cuschieri Investment Services Ltd has not verified and consequently neither warrants the accuracy nor the veracity of any information, views or opinions appearing on this website.

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