As of 09-30-2017

Market Overview

Emerging markets posted strong performance in the third quarter of the year. The returns were driven by stable oil, a still-robust China, improving global economic fundamentals and a continued political improvement in most Latin America countries. Furthermore, the fears of an aggressive NAFTA reformation have abated.

Latin America, Argentina, Venezuela, Mexico and Brazil, as usual, remain the areas of focus. In Argentina, the recent Kirchner political revival hit a road bump as the Cambiemos political coalition had a strong showing in the preliminary vote that occurred in August.  This provided a strong tailwind to Argentine assets.  Venezuela remains volatile and likelihood of a default increased.  However, the composition of Venezuela in emerging-markets indices is much smaller than in past years and is having a marginal effect on the asset class.  In Brazil, central bank credibility appears to have been established while the economy is showing tepid signs of recovering.  Budget deficits persist but fiscal consolidation measures are gaining and the Tamer inflationary environment may now allow the central bank to provide monetary stimulus if necessary.  In Mexico and Central America, easing concerns over a detrimental NAFTA overhaul allowed for continued improvements in asset prices.

In EMEA, regional economic growth remained robust over the quarter. Largely driven by a stable commodity price environment, accommodative fiscal policy and stronger euro-area growth, the region has performed well.  Turkey is perhaps the best example of where all three factors above have combined to lead to an upside surprise to growth in the quarter.  Russia also saw growth accelerate as inflation continued to fall, lifting real wages and consumption.  Sub-Saharan African countries such as Ghana are now beyond the initial commodity price shocks and are adjusting to the new paradigm with IMF assistance.  Finally, one area of concern is South Africa, where a sluggish economy combined with political risks stemming from cabinet changes which culminated in the removal of the respected Finance Minister, and leadership jostling prior to the upcoming ANC conference, has affected overall performance.

A headline story emanating from Asia this past quarter concerned the threat of nuclear capabilities from North Korea. While this concern initially had an effect on global risk sentiment, it quickly abated as most feel North Korea is merely posturing and the dependence on trade with China would prevent North Korea from taking actions which could involve significant trade/aid restrictions with China.  Furthermore, it seems unlikely North Korea would pursue a military offensive against the United States.

Leading up to the Communist Party Congress meeting this fall where a new slate of Chinese leaders will be elected by the party, the Chinese economy has continued on its solid 2017 growth trajectory. High-frequency growth data such as the PMIs, exports and industrial production still point to growth hitting the 6.5% target for 2017.

Fund Performance

For the third quarter of 2017, Federated Emerging Market Debt Fund (Institutional Shares) returned 3.02% 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 3.04%. The J.P. Morgan Emerging Markets Bond Index (EMBI) returned 2.38%.  Allocation to local markets contributed positively to performance as assets in local markets tended to outperform dollar denominated assets.  Security selection and country allocation in corporate and sovereign assets also contributed positively to performance relative to the benchmark during the quarter.  Notably, allocations to Mexico, Brazil, Egypt, Poland and Ukraine contributed positively to relative returns, while allocation to Venezuelan assets had a negative contribution. 

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.

Key Investment Team