As of 09-30-2018

Market Overview

The third quarter of 2018 witnessed the continued presence of global volatility.  Nonetheless, a number of festering global situations saw benign resolution through the period.  Trade policy concerns and higher U.S. interest rates, coupled with idiosyncratic headlines, all contributed to the market’s volatility.  While these situations framed the narrative, positive progress was made in trade relations between the U.S. and Mexico and in diplomatic relations between the U.S. and Turkey. Also, the International Monetary Fund displayed a proactive and pragmatic stance in its dealings with Argentina.

Global trade-relation discussions were a large part of the quarterly story.  The new United States-Mexico trade deal, while positive for the U.S. trade balance, is still amenable to industry in Mexico.  With resolution between the U.S. and Mexico, trade policies involving China moved into the spotlight.  Responses from China exacerbated the fear of a bilateral trade war with the U.S. and with likely ramifications throughout the Asia region.  

As trade talks remained at center stage, fiscal weaknesses dominated the discussions of Argentina and Turkey.  In the case of Argentina, an International Monetary Fund bailout package initially failed to calm the markets.  However, a front-loading of IMF support and a demonstration of pragmatism with respect to the timing of fiscal adjustment targets ultimately led to stabilization in the markets.

Elsewhere in Latin America, Brazil’s upcoming Presidential election displayed the varying sentiments of local electorates from extreme socialist leanings to a renewed nationalism.  While initially it appeared that the socialist party would have an easy sweep, extreme politically conservative leanings have emerged to challenge this assertion.  Local elections in Latin America are occurring against the backdrop of generally strong economic activity and benign (except for Argentina) inflationary environments.

Losing over 30% of its value over the quarter, the Turkish lira bore the brunt of the financial market’s worries over the Turkish economy and its wider financial stability.  At its core, the loss of confidence can be explained by: the inertia in monetary policy in the face of rampant inflation, an overheating economy, significant short-term debt rollovers and asset quality worries at the banks.  Armed with little or no policy response, the reaction from the Turkish authorities only amplified the economic concerns above.  As the quarter progressed, however, market pressures forced the hand of the authorities to sanction a 625 basis-point rise in the repo rate and a medium-term economic framework was announced to resolve the economy’s longstanding imbalances.

Over the quarter, further sanctions were taken against Russia for their alleged involvement in the Skripal poisoning case in the U.K.  Applying measures under the U.S. Chemical Weapons Act, the United States Congress was concurrently working on a draft bill that would apply significantly more pressure to Russia.  The new measures contained in the draft bill focused on preventing the sovereign, financials and key corporates from issuing new U.S. dollar debt, and in some instances, making it much harder for some of these entities to service U.S. dollar debt by preventing them from using the normal internal financial payments system.

Commodity prices continued to be beneficial for raw material exporters.  High oil prices strongly supported the economies of oil exporting countries in Latin America and Sub-Saharan Africa.  There remains a tug-of-war between OPEC members concerning optimal supply levels.

Fund Performance

For the third quarter of 2018, Federated Emerging Market Debt Fund (Institutional Shares) returned 1.11%.  This 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 0.56%.  The J.P. Morgan Emerging Markets Bond Index returned 1.87%.  Overweight allocation to corporate bonds versus sovereign bonds contributed positively to performance as corporate bonds significantly outperformed sovereign bonds during the quarter.  The fund was positioned underweight duration exposure relative to the benchmark which contributed positively to performance as yields tended to rise during the quarter.  Currency allocation (long and short) also contributed positively to performance.  Overweight allocation in the Middle East and North America (including Mexico) contributed positively to performance relative to the benchmark, as both these regions outperformed 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.