Market Sector Update

• The index was up 3.6% in U.S. dollar terms over the second quarter, with most of the return coming from local bond prices and currencies accounting for one third. Lower U.S. Treasury yields and a weaker dollar were supportive.
• Brazil was down 2.1% with the currency down 5.6%, partly offset by yield compression. President Temer appeared to be caught in a corruption scandal and both Moody’s and Standard and Poor's (S&P) revised their credit rating outlooks to ‘negative’. Brazil’s central bank cut interest rates 200 basis points to 10.25%. Mexico gained 7.4% as interest rates were hiked 50 basis points to 7%. Chile was down 0.3% as interest rates were cut 50 basis points against a backdrop of weak growth and falling inflation. Colombia was up 2.7% while Argentina dropped 2.4%. South Africa was up 4.2%.
• Poland, Hungary and Romania all reported good growth numbers, resulting in gains of around 8% for each market. Turkey was up 7.5% after the manufacturing purchasing managers' index (PMI) improved to 54.7. In a country where oil prices and politics remain the key risks, Russia gained 2.4%.
• In Asia, Moody’s credit rating downgrade of China was largely insignificant, with concerns focused on softer growth and manufacturing. Indonesia was up 3% after S&P upgraded the country’s rating to investment grade, matching other major agencies. Growth in Malaysia came in at 5.6%, beating expectations and helping the country advance 4.9%. Thailand was up 2.7%, with growth picking up to 3.3% year on year.

Portfolio Strategy

• Overall, we are cautious on 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 constructive on Asia, where monetary policy is either on hold or there is an easing bias such as in Thailand, where demand from local investors is also supportive. Conversely, South Africa is seeing problematic inflation and a hawkish central bank.This, coupled with high external financing needs and larger than average foreign investor bases, makes them vulnerable in the face of a strong U.S. dollar and rising U.S. Treasury yields.

Outlook

• Investor sentiment became more cautious with commodity prices facing renewed downward pressure from oil and coal to some soft commodities such as sugar.
• Global equities are seeing pressure and the pace of improvements in emerging-markets data has started to slow, which we believe warrants some caution. It is true that emerging-market exports have seen the best rebound in years, but retail sales have seen little pick-up overall and manufacturing PMIs in commodity exporting markets remain challenged. Nevertheless, the big question is whether we are at the turnaround phase after years of falling emeringmarket growth and exports.
• 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. 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 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 June 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.

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