Weekly brief

EM Macro Rebounds But For How Long?

Renewed trade tensions between the U.S. and China caused some market concerns recently. This is taking place in a context where the U.S. President, which seeks reelection in November, lost ground in approval ratings in April. Although we do not expect tariff hikes, mutual defiance might generate volatility in risk assets. We thus express caution as the recent rebound in equity markets pushed valuations to elevated levels.

 

In the space of alternative strategies, Lyxor Peer Groups suggest hedge fund performance was flat so far in May, with Global Macro strategies outperforming (+0.6% as of May 12th) and L/S Equity strategies underperforming (-0.2%). Within Global Macro, Discretionary and Emerging Market substrategies outperformed vs. Systematic during the rebound but underperformed during the selloff. On a year-to-date basis, Systematic Macro delivered better results. Below we focus on EM Macro strategies, which we recently downgraded to Neutral from Overweight.

 

EM Macro strategies have historically proved highly sensitive to two variables: an EM currency index and a sovereign credit benchmark in hard currency. We downgraded the substrategy due to the potential spread of the Covid-19 in EM, the limited room for maneuvering from local authorities on both monetary and fiscal fronts, and the sensitivity to energy and industrial metal prices. Higher credit risks are eventually expected to translate into a wave of sovereign downgrades. Our concerns have materialized. Globally, new Covid-19 confirmed cases have increased by +75k-+85k per day recently, out of which more than 30% comes from large EM (Brazil, Russia, India, Turkey) and another 15% comes from Peru, Saudi Arabia, Iran, Pakistan and Mexico. While we are defensive on EM assets, we stay Neutral on EM Macro strategies. Historically, this range of active strategies delivered reasonable results vs. benchmarks. According to S&P Indices vs Active (SPIVA), 43% of active EM fixed income strategies beat their benchmark on average since 2005 vs. 31% for High Yield Credit strategies in the US. EM Macro strategies have actually partially captured the rebound in sovereign credit, while short positions on EMFX were also rewarded.