Ivy Pictet Emerging Markets Local Currency Debt Fund

Ivy Pictet Emerging Markets Local Currency Debt Fund
03.31.17

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.

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.

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