Maria Vonotna
Performance Discussion
The portfolio trended higher in Q1, outperforming the J.P. Morgan EMB Hard Currency/Local Currency 50/50 Index, J.P. Morgan EMBI Global Diversified Index, J.P. Morgan GBI-EM Global Diversified Index and J.P. Morgan CEMBI Broad Diversified Index for the period.
Investing Environment
Following the market rally that closed out 2023, emerging markets debt had a mixed beginning to 2024. A resurgence of unfavorable US consumer price index prints and a resilient labor market led investors to once again price in the idea that interest rates may stay higher for longer. In reaction, the US dollar strengthened, and US Treasury yields gyrated upward, both weighing on emerging markets debt performance. Countering these headwinds, strong fundamentals and resilient economic growth drove credit spreads to their tightest levels since January 2022, boosting risk assets broadly, including emerging markets debt.
Developed market central banks remained hawkish throughout Q1. The Fed held rates steady for its fourth and fifth consecutive meetings in January and March, respectively. Chair Jerome Powell reiterated the Fed’s commitment to bringing inflation down to its 2% target yet relayed a surprisingly dovish tone after the March meeting and still forecasts three rate cuts in 2024. The ECB and BOE also held rates steady throughout the quarter, though the ECB suggested a rate cut is likely in June assuming data continues to meet expectations. Elsewhere, the BOJ ended its era of negative interest rates when it raised borrowing costs for the first time since 2007.
Central banks in emerging markets are increasingly diverging from their developed market counterparts. In response to the inflationary surge spurred by the COVID-19 pandemic, emerging markets nations swiftly implemented tight monetary and fiscal policy to curb inflation. As inflation in many countries subsides, emerging markets countries continue to evaluate financial conditions and are now finding themselves at varying stages of the monetary policy cycle. For instance, Brazil, Chile and Colombia all lowered interest rates; Serbia and Poland held interest rates; Nigeria, Egypt and Zambia hiked rates throughout the quarter.
Emerging markets sovereign issuance had its strongest three-month start to a year in more than two decades. In the past two years, many investors believed that higher yielding emerging markets countries were priced out of capital markets as elevated US Treasury yields and wider than average credit spreads lifted the cost of debt issuance. Spread compression during Q1, particularly in the high yield segment of emerging markets, allowed many of these countries to reenter the market and successfully issue debt. For example, Ivory Coast, Benin and Kenya were joined by the likes of Mexico, Brazil and Saudi Arabia.
Emerging markets currencies were broadly weaker as the US dollar appreciated, driven by market expectations of prolonged higher interest rates in the US. Changes to local foreign exchange policies resulted in sharp selloffs in several countries. For instance, the Central Bank of Nigeria (CBN) devalued the naira in January, the second time in the past 12 months, and allowed the currency to float freely and converge with the parallel market rate. The CBN also raised interest rates twice during Q1, by 400bps in February and 200bps in March. In the past 12 months, the Nigerian naira has depreciated by 67%. Meanwhile, the Egyptian government allowed the pound to weaken by more than 30% in a devaluation, a policy pivot that led to the country securing a deal with the International Monetary Fund and is expected to attract the support of additional foreign investors.
While emerging markets debt remains at the mercy of an increasingly uncertain global macroeconomic backdrop, local events across the globe continue to shape idiosyncratic returns. Senegal was teetering on the brink of crisis after former President Macky Sall postponed the February presidential election and attempted to extend his final term. Yet, Senegalese dollar bonds rebounded in March after Sall agreed to step down and Bassirou Diomaye Faye clinched the victory. Ecuador bonds jumped after President Daniel Noboa announced the country expects to reach a deal with the IMF and continued to crack down on violence. A new government in Pakistan, led once again by Prime Minister Shehbaz Sharif, boosted Pakistani dollar bonds. Zambia reached an agreement with bondholders, and Sri Lanka and Ghana made forward progress on their debt restructuring talks, lifting the sovereign bonds in each of those countries.
Portfolio Positioning
In our view, the portfolio remains conservatively positioned as geopolitical uncertainty persists, though the team continues to prudently add risk when opportunities arise. The team took advantage of the broad-based currency selloff and local policy changes to increase exposure to certain currency regimes, such as the Egyptian pound and Nigerian naira. The team also added sovereign credit exposure to certain countries with robust fundamentals, strong growth outlooks and attractive valuations, specifically in Latin America and Africa. The portfolio remains overweight duration in emerging markets and underweight duration in developed markets relative to the J.P. Morgan EMB Hard Currency/Local Currency 50/50 Index, translating to an overall underweight duration positioning relative to the index. The portfolio ended Q1 underweight local rates in Eastern Europe as differentiation of fiscal policy across the region grew. Meanwhile, the team increased its overweight to local rates in Latin America, where the disinflation process remains robust.
EMsights Capital Group continues to search for countries with improving storylines where market prices are not fully reflecting fundamentals. The global economy continues to face challenges in 2024, many of which are serving as tailwinds that keep the emerging markets debt outlook strong. With one of the busiest election cycles on record, growing geopolitical tensions and fiscal consolidation continue to present exploitable volatility events.
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Carefully consider the Fund’s investment objective, risks and charges and expenses. This and other important information is contained in the Fund’s prospectus and summary prospectus, which can be obtained by calling 800.344.1770. Read carefully before investing. Current and future portfolio holdings are subject to risk. The value of portfolio securities selected by the investment team may rise or fall in response to company, market, economic, political, regulatory or other news, at times greater than the market or benchmark index. A portfolio’s environmental, social and governance (“ESG”) considerations may limit the investment opportunities available and, as a result, the portfolio may forgo certain investment opportunities and underperform portfolios that do not consider ESG factors. Non-diversified portfolios may invest larger portions of assets in securities of a smaller number of issuers and performance of a single issuer may have a greater impact to the portfolio’s returns. International investments involve special risks, including currency fluctuation, lower liquidity, different accounting methods and economic and political systems, and higher transaction costs. These risks typically are greater in emerging and less developed markets, including frontier markets, and include new and rapidly changing political and economic structures, which may cause instability; underdeveloped securities markets; and higher likelihood of high levels of inflation, deflation or currency devaluations. Fixed income securities carry interest rate risk and credit risk for both the issuer and counterparty and investors may lose principal value. In general, when interest rates rise, fixed income values fall. High yield securities (junk bonds) are speculative, experience greater price volatility and have a higher degree of credit and liquidity risk than bonds with a higher credit rating. Use of derivatives may create investment leverage and increase the likelihood of volatility and risk of loss in excess of the amount invested. The J.P. Morgan (JPM) EMB Hard Currency/Local currency 50-50 is an unmanaged, blended index consisting of 50% JPM Government Bond Index-Emerging Market Global Diversified (GBIEMGD), an index of local-currency bonds with maturities of more than one year issued by EM governments; 25% JPM Emerging Markets Bond Index-Global Diversified (EMBIGD), an index of USD-denominated bonds with maturities of more than one year issued by EM governments; and 25% JPM Corporate Emerging Market Bond Index-Broad Diversified (CEMBIBD), an index of USD-denominated EM corporate bonds. The index(es) are unmanaged; include net reinvested dividends; do not reflect fees or expenses; and are not available for direct investment. Information has been obtained from sources believed to be reliable but J.P. Morgan does not warrant its completeness or accuracy. The Index is used with permission. The Index may not be copied, used, or distributed without J.P. Morgan’s prior written approval. Copyright 2024, JPMorgan Chase & Co. All rights reserved. This summary represents the views of the portfolio managers as of 31 Mar 2024. Those views may change, and the Fund disclaims any obligation to advise investors of such changes. Securities named in the Commentary, but not listed here are not held in the Fund as of the date of this report. Portfolio holdings are subject to change without notice and are not intended as recommendations of individual securities. All information in this report, unless otherwise indicated, includes all classes of shares (except performance and expense ratio information) and is as of the date shown in the upper right hand corner. This material does not constitute investment advice. Attribution is used to evaluate the investment management decisions which affected the portfolio’s performance when compared to a benchmark index. Attribution is not exact, but should be considered an approximation of the relative contribution of each of the factors considered. This material is provided for informational purposes without regard to your particular investment needs and shall not be construed as investment or tax advice on which you may rely for your investment decisions. Investors should consult their financial and tax adviser before making investments in order to determine the appropriateness of any investment product discussed herein. Notional value adjusts for derivatives’ exposures to the market value of a contract’s underlying security, rather than the market value of the contract itself, and represents an approximation of the portfolio’s economic and risk exposures at a point in time. Delta measures the sensitivity of a derivative contract to changes in price of its underlying security; the derivatives contract’s value may be overstated or understated without delta-adjustment. Artisan Partners Funds offered through Artisan Partners Distributors LLC (APDLLC), member FINRA. APDLLC is a wholly owned broker/dealer subsidiary of Artisan Partners Holdings LP. Artisan Partners Limited Partnership, an investment advisory firm and adviser to Artisan Partners Funds, is wholly owned by Artisan Partners Holdings LP. © 2024 Artisan Partners. All rights reserved. |
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