Opportunities Beyond the Domestic Market
There are reasons to remain relatively optimistic about the economy and markets for the months ahead, assuming the impact from coronavirus will be contained. Markets are expecting – for now – continued economic growth and plentiful liquidity, with developed central banks expected to keep interest rates on hold. Low interest rates are boosting demand for emerging market debt as investors looking for yield are pushed towards those segments of the market that can still offer attractive income.
Low interest rates, stable global growth and strong demand for the asset class are expected to be supportive for emerging market debt in 2020. In such context, investing in short duration debt across the emerging markets universe could provide access to a higher yielding asset class with a fraction of the market volatility. Historical performance shows that short duration bonds can offer lower volatility and drawdowns when compared to the wider, all maturities markets. This can be attributed to the pull-to-par effect for short duration bonds as they approach their maturity date, combined with the fact that they provide clearer visibility of cashflows and therefore greater insight into an issuer’s ability to repay its debt.
Steady growth and monetary policy on hold
We expect 2020 to be characterized by a steady growth environment, aided by the expectation that developed central banks will be keeping rates on hold. After three interest rates cuts in 2019, the US Federal Reserve (Fed) is expected to maintain its monetary policy stance as it watches how the US economy evolves. In Europe, the new head of the European Central Bank, Christine Lagarde, inherited a non-conventional monetary policy consisting of zero interest rates and an asset purchasing program, which is expected to be maintained in the absence of a pickup in European inflation. This scenario is typically positive for risk assets such as Emerging Markets.
The fund manager’s view
“We believe that the asset class still offers attractive carry in a low yielding environment, a powerful technical factor we believe will continue to drive flows towards Emerging Markets. A short duration approach offers investors exposure to an attractive yielding asset class while also reducing the impact from any unexpected spikes in volatility, as we have already witnessed this year with tensions in the Middle East and the coronavirus. We could see volatility increase as we edge closer to the US Presidential election and if trade negotiations resurface.”
Sailesh Lad, Head of Active Emerging markets Fixed Income, AXA IM
Mitigating losses during markets drawdowns
AXA World Funds Emerging Markets Short Duration Bonds, our strategy, has a strong track record of reducing the impact of market downturns (see chart below). In 2018 the fund posted a positive performance in a very difficult year for Emerging Markets. Whilst the market fell 4.2% that year, our fund was in fact able to generate a small positive return, finishing the year up 0.37%. This can be attributed to our careful approach to portfolio construction and focus on identifying names with strong fundamentals that we are comfortable holding for the long-term. This approach has resulted in the remarkable fact that since inception, the fund has never had a negative calendar year of performance.
The Emerging Markets Short Duration Bonds strategy is extremely well diversified, investing across over 60 countries in both investment grade and high yield, with exposure to both sovereign and corporate credits. At the end of last year, the fund returned just over 10%, capturing a significant part of the market rally despite its short duration, low volatility approach (see chart below).
Highlights of AXA WF Emerging Markets Short Duration Bonds
- The fund provides access to a higher yielding asset class with a fraction of the market volatility
- It is a highly diversified strategy, investing across both sovereign and corporate bond markets aiming to generate returns
- It follows a total return approach, meaning that the investment team is able to build high conviction portfolios
Source: View from the Markets - AXA IM Core CIO Blog - February 14th, 2020
 Source: AXA IM and JP Morgan data as at 31/12/2018. Performance is shown for the A USD share class gross of fees. Past performance is not a guide to future performance. No assurances can be made that profits will be achieved or that substantial losses will not be incurred.
Source: AXA IM and JP Morgan data as at 31/12/2019. Performance is shown for the A USD share class gross of fees. Past performance is not a guide to future performance. No assurances can be made that profits will be achieved or that substantial losses will not be incurred.
The capital of the Fund is not guaranteed. The Fund is invested in financial markets and uses techniques and instruments which are subject to some levels of variation, which may result in gains or losses.
Additional Risks Counterparty Risk
Counterparty Risk: Risk of bankruptcy, insolvency, or payment or delivery failure of any of the Sub-Fund's counterparties, leading to a payment or
Geopolitical Risk: investments in securities issued or listed in different countries may imply the application of different standards and regulations.
Investments may be affected by movements of foreign exchange rates, changes in laws or restrictions applicable to such investments, changes in exchange control regulations or price volatility.
Liquidity Risk: risk of low liquidity level in certain market conditions that might lead the Sub-Fund to face difficulties valuing, purchasing or selling all/part of its assets and resulting in potential impact on its net asset value.
Credit Risk: Risk that issuers of debt securities held in the Sub-Fund may default on their obligations or have their credit rating downgraded, resulting in a decrease in the Net Asset Value.
Impact of any techniques such as derivatives: Certain management strategies involve specific risks, such as liquidity risk, credit risk, counterparty risk, legal risk, valuation risk, operational risk and risks related to the underlying assets.
The use of such strategies may also involve leverage, which may increase the effect of market movements on the Sub-Fund and may result in significant risk of losses.
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AXA WF Emerging Markets Short Duration Bonds is a sub-fund of AXA World Funds. AXA WORLD FUNDS ‘s registered office is 49, avenue J.F Kennedy L-1885 Luxembourg. The Company is registered under the number B. 63.116 at the “Registre de Commerce et des Sociétés” The Company is a Luxembourg SICAV UCITS IV approved by the CSSF and managed by AXA Funds Management, a société anonyme organized under the laws of Luxembourg with the Luxembourg Register Number B 32 223RC, and whose registered office is located at 49, Avenue J.F. Kennedy L-1885 Luxembourg.
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