February 2020 Commentary
With growth settling back to the roughly 2% pace prevailed during the decade-old economic expansion, fears of a global recession lessening, and the manufacturing cycle seemingly heading for a turnaround following a ‘phase one’ agreement between US and China, outlook for 2020 vis-à-vis economic growth seemed positive. Economic data had started to improve whilst yields started to portray the possibility of a broad economic recovery.
Albeit the initial uptick in January, treasury yields traded downwards, as investors; worried about the potential impact on global economic growth and corporate earnings, as a protectionist measure against economic downturn, shunned global equities, wiping out months of gains, and sought the relative safety of sovereigns.
Subsequent to the increased demand for safer assets, and reflecting expectations of a possible rate cut, the U.S. mostly sought benchmark; the 10-year Treasury Yield tumbled by 37.8 basis points, for the month of February and headed downwards to the 1 per cent levels, closing the month at 1.126 per cent.
Notably, due to the latter shift towards less risky assets, Global HY bond spreads over treasuries significantly widened, closing-off the month on a much weaker note.
From the macroeconomic front, the U.S. reported a slightly lower Manufacturing PMI to 50.7 from 51.90 in January, pointing to the slowest expansion in factory activity in six months, amid historically subdued gains in output and new orders. Similarly, U.S. Services PMI dropped to 49.4 from 53.2 in the previous month, and well below market expectations of 53, shown in a preliminary estimate.
The CC Global High income fund continued to preserve its capital with monthly loss of 0.03 percent despite the notable widening in spreads. Internal comparable indices were down 1.8 percent as volatility prevailed. In line with the downward trend in yields, the Manager opted to go long the UST curve and benefit from the yield tightening in sovereigns, while limiting downside risk by raising cash levels in the more risky bit of the asset class.
