As of 12-31-2017

Market Overview

During the fourth quarter of 2017, financial markets were impacted by a myriad of headlines. Such drivers included the continued tense rhetoric and saber-rattling between the United States and North Korea; political turbulence in Peru and South Africa; a wide-sweeping anti-corruption campaign in Saudi Arabia related to an underlying power struggle; regional jostling driving ruptures within Lebanon; a U.S. investigation, prosecution and ultimate conviction related to Iranian sanctions violations by Turkish banks; the failure of the government of Venezuela to make bond payments; and the continued ambiguity surrounding NAFTA renegotiations between Canada, Mexico and the U.S.  Despite the sheer number of concurrent sources of unrest and volatility, emerging-market bonds performed well over the recent period.  Apart from the primary aforementioned narratives, renewed confidence in the political structures, as well as the abilities of central governments in Latin America to attract investment while exhibiting signs of fiscal discipline, became the prevalent themes.  In particular, Argentina witnessed a resurgence of investment attributed to greater indications of central bank success in targeting inflation, coupled with tangible steps taken towards fiscal discipline and infrastructure investment.  Positive economic momentum was also present in markets on a global scale.

The presence of such momentum is evident in the strength of developed markets, the continuation of robust commodity prices and the product of pro-growth measures taken during the recent economic downturn. In regards to China, the country’s economy continued its growth at healthy levels while avoiding the so-called “hard landing.”  As a result, China remained a tailwind for growth among its fellow emerging-market economies.  Furthermore, expectations of aggressive rate hikes in the U.S. were not met by the Federal Reserve (Fed), thus allowing for a benign interest rate environment where both countries and companies can access capital.  The low interest rate environment in the U.S. continues to make yields in emerging-market assets an attractive alternative.  Therefore, asset prices in emerging markets are positively affected by more moderate prospects of Fed rate hikes.

In Latin America, the Venezuelan default dominated the recent headlines. The default, although anticipated, triggered a sharp drop in the prices of Venezuelan assets.  Any plausible contagion from Venezuela was contained, however, as the particularities of the Venezuelan economy have very little effect on the economies of other regional countries.  In contrast to Venezuela, economic output throughout the remainder of Latin America remained robust.  The economies of Peru, Chile and Brazil all surprised to the upside with positive growth trends.  Brazil, in particular, has been the major standout following its struggle with a protracted recession.  The country appears to have entered a healthy growth trajectory as indicated by GDP figures and loan volume growth.

In addition to strong economies in Latin America, the effects of longer-term structural and fiscal reforms have been the catalyst for further Foreign Direct Investment into the region. For example, Argentina has continued its implementation of infrastructure investment though the use of transparent public-private partnerships and expects international investors to participate in a number of upcoming projects.  On the other hand, Brazil was more measured in the progress it achieved on fiscal and structural reforms.  Although the country was able to achieve significant progress on the fiscal reform front, the highly contentious issue of pension reform remains unresolved.

Turning to the political environment of Latin America, the occurrence of default by the Venezuelan government did not usher any substantial material backlash against the government of President Nicolas Maduro. That being said, Latin America was not completely devoid of any political drama.  In Peru, market-friendly and center-right President Pedro Kuczynski narrowly escaped impeachment at the end of December.  Kuczynski’s impeachment charges stemmed from links to “Operation Car Wash” and involved his ties to the Brazilian construction firm Odebrecht.  The President was accused of taking funds from Odebrecht while serving as Peru’s finance minister and prime minister in the early 2000’s.  Honduran President Juan Orlando Hernandez, who is regarded as fiscally responsible and economically progressive, experienced a surprisingly tight and closely contested election before securing victory.  On the positive side, Chileans re-elected business-friendly former President Sebastian Pinera with higher-than-expected voter margins.  The re-election of Pinera was strongly viewed as positive from the market’s standpoint.

Another area of focus during the period surrounded the renegotiations of NAFTA. Although negotiations have continued between the three trading partners, there has yet to be an agreed upon resolution.  Instead, talks have been extended into 2018.  The outcome of the talks are of keen importance to Mexico.  Additionally, it is widely expected that any revisions to NAFTA will be used as a foundation for future proposals to change CAFTA (Central American Free Trade Agreement).  Countries that would be affected by any update related to CAFTA would include the Dominican Republic and Costa Rica.

Pivoting to South Africa, the quarter was dominated by the ANC electoral conference that was held to elect a successor to current incumbent President Jacob Zuma. With the advantage of having over 50% in the polls, an ANC president in post-apartheid South Africa almost automatically becomes state president.  Elections are currently scheduled to be held during 2019.  The focus of the conference centered on the interparty rivalries and political leanings of the candidates.  Observers hoped to use the conference’s atmosphere as a means to shed some light on the future direction of the country.  The outcome of the conference became even more crucial as the country’s sovereign credit rating stood at the cusp of losing its investment-grade status at all three of the major rating agencies.  In the end Cyril Ramaphosa, the leading candidate in terms of anti-corruption and fiscal responsibility, prevailed.  Such a positive development has allowed the market to pause and digest the result.

As mentioned previously, Turkey and a number of Turkish banks were enveloped in a U.S. trial following an ongoing Federal investigation into the activities of certain state banks accused of violating Iranian sanctions. The drama surrounding the case was fueled by a number of officials, as well as a high-powered gold trader with links to the Erdogan family who testified for the prosecution as government witnesses.  The sheer volume of evidence in the trial being released further exacerbated market concern.  The large fines levied by U.S. authorities on European counterparties for similar sanction violations serve as a precedent for the market to believe that the Turkish government will be required to extend its financial support. 

Although historically stable in terms of political upheavals, the Gulf region suffered a major shock with the recent Saudi Arabian anti-corruption campaign. The push resulted in the imprisonment of a number of members of the House of Saud on the accusations of embezzlement of state funds and bribery.  The arrests were primarily interpreted as a consolidation of power by the Crown Prince Mohammed Bin Salman.  The Crown Prince also turned his eye towards the increasing involvement of Iranian-backed Hezbollah in the coalition government of Lebanon, orchestrating the resignation of Lebanon’s Prime Minister Saad Al Hariri.  In a turn of events, Prime Minister Hariri resigned his position while in Saudi Arabia rather than in Lebanon.  The resignation, however, was rejected by the Lebanese president with a standoff ensuing.  Ultimately, Hariri returned to Beirut and a compromise was achieved that allowed the prime minister to serve out the remainder of his term until its expiration this upcoming spring.  As the events unfolded, markets witnessed a broad sell-off in both Saudi and Lebanese assets, with risk premiums adjusting to the new, more forceful regional politics.

Fund Performance

For the fourth quarter of 2017, Federated Emerging Market Debt Fund (Institutional Shares) returned 0.09% 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 0.19%. The J.P. Morgan Emerging Markets Bond Index returned 0.54%.  Allocation to local markets contributed negatively to performance as assets in local markets tended to underperform dollar-denominated assets.  Duration exposure contributed positively to performance relative to the benchmark as the fund was underweight duration for the majority of the reporting period.  Country allocation 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.