As of 06-30-2018

Market Overview

The second quarter of 2018 witnessed the continued presence of global volatility. Trade policy concerns and higher U.S. interest rates, coupled with idiosyncratic headlines, have all contributed to the market’s narrative.  This has been especially clear in regards to global currencies, with particular pressure on countries with large fiscal and current account deficits (e.g. Argentina and Turkey).

The recent quarter included the continuation of NAFTA discussions, with no tangible outcome yet to reach fruition. At the same time, trade policies involving China have moved into the spotlight.  Responses from China have exacerbated the fear of a bilateral trade war with the U.S.  As a result, the remainder of Asia and Latin America have felt the effects.

As trade talks remained in center stage, fiscal weaknesses became apparent in both Argentina and Turkey. The two countries were each the site of intense currency pressures, thus resulting in intervention from the respective central banks.  In the case of Argentina, the situation led to involvement from the IMF in the form of a $50 billion bailout package.  The catalyst was investors’ concerns regarding the country’s large fiscal account, coupled with doubts on whether President Macri would be able to juggle reducing the fiscal deficit while maintaining adequate electoral support.  Turning to Turkey, the lira was punished for the unorthodox and non-independent monetary policy driven by the country’s executive branch.  Furthermore, Turkey’s President Erdogan was re-elected.  Erdogan is widely perceived as being non-market friendly.

Latin America experienced a surge in populist sentiment during the recent quarter. Left-wing Mexican presidential candidate Andrés Manuel López Obrador (AMLO) solidified his lead in the polls, signaling a desire for a change to corruption and the overall status quo.  Elsewhere, in Brazil, the upcoming election appears to test the country’s commitment to current President Michel Temer’s pro-market policies.  In Colombia, business-friendly candidate Ivan Duque decisively won the race for the presidency.  In addition, both Chile and Peru maintain center-right administrations that pursue pro-growth policies.

Venezuela remained a country in crisis, with Nicholas Maduro maintaining a tenuous grip amongst the populace at large, as well as his own fractured supporters. The quarter also witnessed a thwarted conspiracy attempt to remove Maduro from power.  The economy continued to remain subject to high unemployment, rampant inflation and a shortage of basic necessities.

Commodity prices continued to be beneficial for raw material exporters. Oil remained above $60 a barrel, which 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.

Overall, geopolitical issues remained at the forefront, highlighted by the continuing dialog between President Trump and North Korea’s Kim Jung Un regarding the latter’s nuclear program. Additionally, pressures related to the future solidarity of the European Union should not be discounted.  That continent is seeing an ever-increasing wave of populist fervor and a growing sentiment against the current status of the European project.

Fund Performance

For the second quarter of 2018, Federated Emerging Market Debt Fund (Institutional Shares) returned -6.27%. 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 -6.10%.  The J.P. Morgan Emerging Markets Bond Index returned -3.51%.  Allocation to local markets contributed negatively to performance as assets in local markets underperformed dollar-denominated assets.  Duration exposure contributed positively 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