As of 03-31-2018

Market Overview

During the first quarter of 2018, financial markets were impacted by a resurgence in volatility,    although the underlying growth story in emerging markets remains intact.  Concerns over trade policies and rising U.S. interest rates reintroduced volatility to risk assets but the net change in emerging-market fixed income asset prices was minimal during the quarter.  The market observed positive growth stories and encouraging political developments in Latin America and South Africa, which helped tempered the political volatility in the Middle East, the potential for trade policy changes and the risk-off pressure from rising U.S. interest rates.

Trade policy discussions were a center point of first quarter 2018 with a pattern of calls for drastic changes in tariffs and policies, moderating to more benign changes.  The focus on NAFTA persisted as well as the introduction of talk on reforming trade policies with China.  Additionally, steel tariffs were imposed, however, the initial suggestions were much more onerous than what was ultimately implemented.  The quarter witnessed hints of progress on the NAFTA discussions.  Such progress was supportive of asset prices in Mexico and Central America.  The talks with China are in early stages and it is unclear how aggressively the current trade format will change.

While trade talks were taking center stage, the political backdrops were improving in many countries in the Latin American space.  The risk of a non-market-friendly candidate taking office in Brazil was greatly reduced as former president Lula’s conviction was upheld, hamstringing his ability to run for president.  In Argentina, pro-market President Macri continues to push for fiscal consolidation and infrastructure investment.  In Colombia, none of the candidates for president are running on platforms that are considered negative for economic growth.  One exception is the election cycle in Mexico where leftist candidate Andres Manuel Lopez Obrador (AMLO) has been leading the polls.

The economies in Latin America showed signs of improvement during the first quarter of 2018.  Unemployment levels in countries such as Brazil, Argentina and Chile continued their drift lower during the quarter confirming the notion that these countries have emerged from the economic malaise they experienced during 2014 and 2015.  With the exception of Argentina, consistent through the Latin American region was a reduction in inflation.  Success in lowering inflation in Brazil and Chile is a testimony to central bank credibility.  Argentine inflation remains elevated, but declining unemployment and strengthening GDP on the whole still point to an improving economic story. 

Venezuela remained a country in crisis with Nicholas Maduro maintaining a tenuous grip amongst the populace at large and his fractured supporters.  The economy remained subject to high unemployment, extreme inflation and a dearth of basic goods.  No steps were taken in the quarter towards a comprehensive economic or political transition.

Commodity prices remained in ranges that were constructive for raw material exporters.  Oil remained above 60 dollars a barrel, which strongly supported the economies of oil-exporting countries in Latin American and Sub-Saharan Africa.  Even commodities such as copper, which had lower prices during the quarter, remained above the marginal cost of production for most producers. 

Away from the economic growth and commodity prices in emerging markets, the quarter saw a rise in geopolitical issues.  The Turkish government ordered a military excursion into Northern Syria sparking fears of a wider regional conflict.  These events weighed on Turkish asset prices.  In South Africa, the quarter was dominated by resignation of President Jacob Zuma.  This was viewed favorably by the markets.  A dominant story in Asia rested on the potential for President Trump to make headway regarding North Korea’s stance on possessing a nuclear arsenal.    Resolution still has not been achieved.   

Fund Performance

For the first quarter of 2018, Federated Emerging Market Debt Fund (Institutional Shares) returned 0.03% compared to the equally-weighted J.P. Morgan Emerging Markets Bond Index Global/J.P. Morgan Corporate Emerging Markets Bond Index/J.P. Morgan Government Bond Index-Emerging Markets-Unhedged return of 0.70%.  The J.P. Morgan Emerging Markets Bond Index returned -1.78%.  Allocation to local markets contributed positively to performance as assets in local markets significantly outperformed dollar-denominated assets.  Duration exposure contributed negatively to performance relative to the benchmark.  Country allocation and security selection in corporate and sovereign assets contributed positively to performance relative to the benchmark during the quarter. 

Performance data quoted represents past performance, which is no guarantee of future results. Investment return and principal value will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than what is stated. Other share classes may have experienced different returns than the share class presented. To view performance current to the most recent month-end and for after tax returns, click on the Performance tab.

Click on the Performance tab for standard fund performance.