July 2019 Commentary

Markets saw a mixed sentiment throughout the whole of July; uncertainties revolving around the Fed’s decision to a cut rates along with ECB’s Mario Draghi hinting at easing were the stars of the month. Needless to say, investors were seen to take a cautious approach during the month after the rally seen in the month of June. By the end of July, the Fed cut rates by 25bps, a move which was not digested positively by markets that expected a more aggressive stance. On the other hand, Mario Draghi left rates unchanged, however indicated that the downward trend in data will be monitored and easing actions will be taken if deemed necessary.

In the Emerging Market world, Turkey’s consumer inflation slowed to its lowest level in June due to a high base effect from the prior year and a drop in food prices. This potentially led Turkey’s central bank to sharply cut its key interest rates by a more than expected, 425bps after the central bank governor was fired.

We also saw China’s factory activity shrink for the third month in a row in July and Q2 GDP was the weakest data seen in 27 years, underlining the growing strains placed on the world’s second largest economy. In addition, China‘s June surplus widened to USD 50.98 billion from USD 40.91 billion as exports fell by 1.3 percent, while imports decreased at a faster pace of 7.3 percent. In the month of July, tables turned as the U.S economy improved and the Chinese economy deteriorated. That being said, the People’s Bank of China (PBOC) has finally started to ease monetary policy conditions for consumers and businesses. In order to maintain growth following the U.S tariffs, the PBOC produced a coordinated response in the form of liquidity stimulus and fiscal measures. To underline its easing bias, the PBOC provided another 100bps cut to its reserve requirement ratio, injecting further liquidity.

The emerging market that outshined during the month of July was Brazil especially due to the news that the government plans to go ahead with the pension reform that could result savings amounting to USD 900 billion. Trump has also offered Brazil the chance to negotiate a free trade deal that the country was keen on accepting. In addition to, Brazil’s poultry exports increased by 64 percent in June and hence, revenue increased by 76.6 percent year-on-year. This resulted in a positive for the Brazilian names our fund holds.

Furthermore, in anticipation of the Fed’s rate cut, emerging market countries followed the steps of the Fed and cut rates. The Central Bank of Russia, South Korea’s central bank and the Bank of Indonesia all cut their rates by 25bps and hinted that more cuts were likely this year. The Reserve Bank of India also hinted that markets should see a series of rate cuts equivalent to 100bps depending on the economic data produced.

In the month, Emerging markets saw a 1 percent gain in the month of July, once again beating European High Yield and U.S High Yield. Emerging markets have shown more resilience to the ongoing trade war uncertainties due to reporting overall positive economic data from various EMs, in addition to a relatively stable dollar currency.

The Manager believes that emerging market valuations possibly still offer value. However, the Manager in the month opted in de-risking the portfolio from specifics, while it opted to seek value in other geographical regions in which the Manager believed there is value, with the likes of CSN that benefitted from iron ore prices.