Strong Performance Amid Political Uncertainty

Strong performance amid political uncertainty

Q: How has the strategy performed so far in the fourth quarter?

A: The strategy has performed very well in this environment, especially given the volatility in markets. The Trump election was a surprise. His economic policies and his growth outlook has certainly moved yield curves out significantly, and that's had an impact on all bond markets, including high yield.

More recently we've had OPEC and a cut in production that has caused the energy sector to rally quite aggressively, but even more recently we've seen the Italian referendum, a resounding ‘no’.

What does that mean for political uncertainty and the future of Europe? Largely the markets haven't reacted significantly on that because it was pretty much priced in, but (as for) the future, we'll see.

Q: What have been the drivers of performance?

A: So there have been three drivers of the outperformance over the month, the first one being the economic mindset from the Trump elections, the more positive (outlook on) growth and therefore yield curves have moved up around the globe, and that meant that a shorter duration, higher coupon, high yielding strategy such as ours has outperformed.

The second factor is really single B versus double B. Double B has been trading a little bit overvalued in terms of the ECB (European Central Bank) bond purchase program which has driven yields down in the double B space. The double B bonds have also got a longer duration and are much lower yielding and have a lower coupon. We've been overweight the single B. Single Bs outperformed double B, so that's really helped performance.

The third factor which is driving outperformance has been the earnings season. We've seen some really poor earnings releases and some really strong earnings releases and we've been invested in the right securities which have had good earnings, and we've avoided the losers, we've avoided those bonds which have had weak earnings?

Q: What is your outlook for 2017?

A: The outlook for next year is probably one of more political uncertainty, more uncertainty in the markets. We've got the Fed (US Federal Reserve) and the ECB coming with policy decisions very soon. The likely course of action is a Fed hike with the economic data and the growth we've seen in the U.S., and we think there will be a Fed hike in December and then two more Fed hikes next year.

The ECB has also come to market, and we think they're going to perhaps extend their programme, and we're not a hundred percent sure whether they'll taper or not, but there's certainly a likelihood of that happening. On the political front, we've seen the polls get it spectacularly wrong with regard to Brexit and (US President Elect Donald) Trump.

Next year we have the Dutch elections, we've got the French elections as well as the German elections, so perhaps more political uncertainty will drive markets and market volatility, and I haven't even mentioned the ‘Trump effect’: the rhetoric he has toward China at the moment.

So all these factors will lead to more uncertainty, but you have to position your portfolio accordingly, and we think we're very well positioned for next year. We have a higher coupon, shorter dated portfolio. That yield cushion is really helping. We're also highly selective picking the winners.

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