Market Sector Update

• The Fund's benchmark, the JP Morgan GBI-EM Global Diversified Index, was down 1.8% in U.S. dollar terms over the quarter. Mexico was the strongest performer as they were up 5.6% after Lopez Obrador won the presidential election. Chile was up 0.3% after holding their policy rate at 2.5% and gave a hawkish message.Brazil ended the quarter down 0.9% after a big sell-off of 10.2% in August, which was due to upside risks to inflation and amidst continued uncertainty surrounding the upcoming elections.
• Argentina was the worst performer over the quarter following disappointing expectations for growth, rising inflation to 28%, emergency rate hikes to 60% and a request for an emergency release of an International Monetary Fund loan sparked a sell-off of 36%.
• South Africa was down 1.3% where second quarter data showed that the economy had sunk into a technical recession and there were concerns on land reforms.
• Turkey was down 20.1% over the quarter despite a big rally back in September of 25.4% when the central bank delivered a surprise hike of 625 basis points.
• Russia was down 5.4% where industrial production softened to 49.5 and the central bank hike by 25 basis points against market expectation. Officials chose to take a defensive stance in an external environment of capital outflows and escalating sanctions, which has weakened the ruble and increased inflation risks.

Portfolio Strategy

• Our current strategy is to be overall underweight local rates – but with some differentiation across markets. With higher trending global core yields and higher commodity prices this supports our overall bias.
• Markets with low real rates, inflationary pressures in the pipeline or poor fiscal dynamics are prime candidates. There, Turkey, Romania, Hungary and Poland are prime examples.We do however recognize much better value across some of the more fundamentally sound stories in emerging markets and we are actively exploring these from the long side.
• We remain more constructive in Mexican rates and await tactical opportunities on the South African curve.
• We expect differentiation themes to be increasingly at play into year end after the broad based sell-off this year and we see a rich environment for relative value plays ahead.

Outlook

• Sentiment towards emerging markets are continuing to stabilize following a series of more constructive developments in some of the stressed stories, such as Turkey and Argentina. That said, the outlook remains challenging still going into year-end as a renewed push higher in core rates puts further pressure on emerging market funding.
• Not all of it is bad news as the core rates recovery is at least partially a reflection of high growth expectations for the US and improved expectations for Europe – thus spilling over positively to the global economy. However, the latest leg higher in oil is also partly to blame and it looks to be mostly a supply side driven shock, with the potential to start creating a drag on global growth and so it needs close monitoring. This is creating a mixed environment for emerging markets with a sharper distinction between oil importers and exporters.
• Upcoming Brazilian elections are a source of near term uncertainty, with the reform outlook heavily influenced by the final outcome. We are following the elections closely for changes to our mid-term outlook for Brazil.
• The imposition of the latest tariffs on goods from China was taken well by the market and good news on trade is coming in the form of a renegotiated NAFTA, removing a significant source of uncertainty for the outlooks of Mexico, U.S. and Canada.

The opinions expressed are those of the Fund’s managers regarding Class I shares 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, 2018, 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.

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