Ivy Pictet Emerging Markets Local Currency Debt Fund

Ivy Pictet Emerging Markets Local Currency Debt Fund
09.30.17

Market Sector Update

  • The Fund's benchmark, the JP Morgan GBI-EM Global Diversified Index, posted a gain of 3.6% in U.S. dollar terms in the third quarter, with almost two-thirds of the return stemming from from local bond prices while currency gains were supported by a weaker U.S. dollar.
  • Brazil posted a gain of 10.8%, with over half the return coming from local bond prices, as lower inflation led to interest rate cuts of 200 basis points. Mexico gained 1.3%, as uncertainty regarding trade deals and tighter fiscal and monetary policies are potentially impacting growth. Chile gained 3.2%, partly helped by a jump in copper prices.
  • South Africa recovered towards quarter end, and ended with a 0.5% return. The central bank surprised with an interest cut of 25 basis points and investment remained in contraction.
  • Indonesia gained 2.9% with the latest gross domestic product (GDP) print of 5% year on year. The Philippines disappointed, posting a -0.2% return, while Malaysia posted a gain of 3.0% after favorable consumption boosted growth to 5.8%. Thailand gained 3.2%, with inflation increasing to 0.3% from 0%.

Portfolio Strategy

  • Overall, we are mostly neutral emerging-market currencies, but we have become more constructive with underweights representing short-term tactical positions and overweights likely to be more strategic. We have a small overweight to local rates, which is supported by continued low global yields and a commitment to pro-growth monetary policies in most emerging-market countries on the back of low inflation.
  • In currencies, we remain more neutral in Asia as manufacturing and growth have been more stable and are mostly benefiting from lower commodity prices. Conversely, we remain cautious on those vulnerable currencies that are more linked to commodities, sluggish growth and political issues. Key examples include the South African rand, Russian rouble and Brazilian real.
  • In local rates, we remain fairly constructive on Asia. Monetary policy is either on hold or there is an easing bias, as in Thailand, where demand from local investors is also supportive. We are likely to maintain a neutral to small underweight position in Eastern European local rates as yields are at very low levels, with the general monetary policy easing bias coming to an end.

Outlook

  • Currently, we feel investor sentiment has become more cautious, with geopolitical issues surrounding North Korea, continued concerns about oil prices and less accommodative central banks.
  • The asset class has seen the largest inflows in 2017 in five years, while returns have been positive every month in 2017 for the first time on record. We believe the market has got ahead of itself and is due for a correction.
  • At the same time, the pace of improvements in emerging-market data started to slow, even though it has remained robust. While it is true that emerging-market exports have seen the best rebound in years, retail sales have seen little pick-up overall and manufacturing in commodity-exporting markets remain challenged.
  • While we expect U.S. Treasury yields to be range-bound, we could see a renewed stronger U.S. dollar putting pressure on the asset class. We believe disinflation in emerging markets is mostly at an end, though we could see more interest rate cuts in Latin America, Russia and, potentially, Asia presenting opportunities.The big picture is that we believe the long-term prospects remain attractive compared with other fixed-income asset classes.

The opinions expressed are those of the Fund’s managers and are not meant as investment advice or to predict or project the future performance of any investment product. The opinions are current through Sept. 30, 2017, are subject to change at any time based on market and other current conditions, and no forecasts can be guaranteed. This commentary is being provided as a general source of information and is not intended as a recommendation to purchase, sell, or hold any specific security or to engage in any investment strategy. Investment decisions should always be made based on an investor’s specific objectives, financial needs, risk tolerance and time horizon. Past performance is not a guarantee of future results.

The JP Morgan GBI-EM Global Diversified is an unmanaged index that tracks the performance of emerging market debt. It is not possible to invest directly in an index.

Risk factors: As with any fund, the value of the Fund's shares will change, and you could lose money on your investment. An investment in the Fund is not a bank deposit and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. International investing involves additional risks, including currency fluctuations, political or economic conditions affecting the foreign country, and differences in accounting standards and foreign regulations. These risks are magnified in emerging markets. Fixed income securities are subject to interest rate risk and, as such, the net asset value of the fund may fall as interest rates rise, especially securities with longer maturities. Investing in below investment grade securities may carry a greater risk of nonpayment of interest or principal than higher-rated bonds. The Fund may seek to manage exposure to various foreign currencies, which may involve additional risks. The value of securities, as measured in U.S. dollars, may be unfavorably affected by changes in foreign currency exchange rates or exchange control regulations. Investing in foreign securities involves a number of risks that may not be associated with the U.S. markets and that could affect the Fund’s performance unfavorably, such as greater price volatility; comparatively weak supervision and regulation of securities exchanges, fluctuation in foreign currency exchange rates and related conversion costs, adverse foreign tax consequences, or different and/or less stringent financial reporting standards. Sovereign debt instruments are also subject to the risk that a government or agency issuing the debt may be unable to pay interest and/or principal due to cash flow problems, insufficient foreign currency reserves or political concerns. Risks of credit-linked notes include those risks associated with the underlying reference obligation, including but not limited to market risk, interest rate risk, credit risk, default risk and foreign currency risk. The buyer of a credit-linked note assumes the risk of default by the issuer and the underlying reference asset or entity. If the underlying investment defaults, the payments and principal received by the Fund will be reduced or eliminated. Also, in the event the issuer defaults or there is a credit event that relates to the reference asset, the recovery rate generally is less than the Fund’s initial investment, and the Fund may lose money. The use of derivatives presents several risks including the risk that fluctuation in the values of the derivatives may not correlate perfectly with the overall securities markets or with the underlying asset from which the derivative’s value is derived. Moreover, some derivatives are more sensitive to interest rate changes and market fluctuations than others, and the risk of loss may be greater than if the derivative technique(s) had not been used. Derivatives also may be subject to counterparty risk, which includes the risk that a loss may be sustained by the Fund as a result of the insolvency or bankruptcy of, or other non-compliance by, another party to the transaction.These and other risks are more fully described in the Fund's prospectus.