QUARTERLY UPDATE AFRICAN & FRONTIER MARKETS FUND

Highlights

2018 closed with an unusually weak December. Falling PMIs globally and the rapidly declining Citi global economic surprises indicator (which fell for 3 consecutive months while staying above June 2018 lows) added to investors’ anxiety.

Risk assets posted one of their worst quarters in modern history as long-term interest rates declined in major developed and emerging markets on threats to global trade and global economic growth.

The U.S. Federal Reserve increased its base rate as expected in December, its president indicated that money market rates are close to neutral territory, leaving room for less tightening throughout 2019.

In Europe, the ECB confirmed the end of its quantitative easing program while in Japan, the BOJ increased the limits of intervention that are guiding its monetary policy. This rapidly evolving monetary landscape held back the U.S. dollar which appreciated by only 1% against developed market peers while emerging market currencies reversed their previous quarter losing streak and appreciated on average.

Headline inflation declined in major economies while exemptions from U.S. sanctions on Iranian oil exports and rapidly rising American oil production caused oil prices to crash by more than 30%.

The interest rate curve continued to flatten in the U.S. and even inverted between 1 and 7 year maturities while 10Y interest rates declined 38 bps during the quarter.

The U.S. dollar, as measured by the DXY, appreciated significantly during October and November before declining during the last month of the quarter.

Broad commodities declined 9.4% as losses in energy and industrial metals offset gains in precious metals and agriculture. 

The S&P 500 crashed 13.5% as market breadth deteriorated the most since 2015 and underperformed other major equity markets, except for Japan as technology and more generally growth oriented stocks underperformed.

Cyclicals and smaller companies experienced a significant correction, having declined more than 20% since their most recent highs in August and September. 

The Italian Budgetary crisis had no contagion effects on other European periphery markets while EM equities held-up better.

Global equities declined 12.5% while global emerging markets and global frontier markets lost 7.5% and 4.3% respectively. Global bonds added 1.4% while high yield spreads widened significantly. Yield spreads in emerging market external debt reversed gains while local debt benefited from stabilizing currencies with the exceptions of Russia and Mexico.