The Horatius Fund Newsletter - October 2019
The Fund returned +0.16% during October.
We are delighted to report that Horatius has been nominated in the HFM European Emerging Manager Awards 2019.
We wrote here a month ago of our somewhat cautious stance, reflecting concerns that assorted hotspots of heightened political fragility together with many markets trading at or around YTD highs had left us disinclined to be too brave. In the event, October will go down as a month which, judged superficially at least, saw decent risk appetite with equity markets, in particular, outperforming. The S&P broke back through the 3,000 level for a 2% gain while EM equities fared better still, registering a rise of just over 4% for the month. In our opinion, though, such impressive-looking numbers reflect not so much an expectation that growth is picking up or corporate profitability improving but rather two potential negative scenarios that didn’t happen (yet) and one technical that did (but which may not happen again).
Firstly, the continued shadow boxing contest between the U.S and China appeared to show signs of détente recently, with what President Trump describes as a “Phase One Trade Deal”. This would see China buying more agricultural products, accelerating financial sector reform and adhering to more internationally-accepted criteria regarding its currency. More recently, the optimism has even extended to the possibility that not only might future tariffs be avoided but that it may also work retrospectively. Clearly, were such an outcome to be achieved it should and would be reflected across markets. However, we remain sceptical that a meaningful deal is within such easy reach. Ultimately, what is at stake is the prize of becoming the world’s leading technology player. Whilst it is in neither country’s interest to see an escalation of the hostility (nor, indeed, the rest of theworlds’) the disagreement is very real and is about more than just saving ‘face’. As in all things, China - because it can – is able to take the longer-term view, to be more patient. With the U.S. presidential elections approaching next year, Trump may also be inclined to play the anti-China card in an attempt to garner more support at home. Thus, even as both sides talk of ‘progress’, and even if some sort of deal is actually announced it remains the case that the de facto relationship between the two countries is likely to remain challenging for years to come.
Secondly, Brexit. Of the three factors this is the one that has arguably seen the most genuine progress. Boris Johnson has, finally, agreed the outlines of a Brexit treaty with the EU which was agreed in principle by the UK parliament. MPs, though, were not prepared to rush the necessary legislation through parliament – although, it DID still appear that this could have been achieved by Christmas. Johnson, though, whose mantra hitherto had been to “Get Brexit Done”, now appears to have relegated this priority and has now altered his strategy to holding a General Election on the 12th of December – an attempt to establish a greater parliamentary majority.
However, we know all too well the unpredictability of election outcomes and so, even though current polls indicate the Conservatives on around 37% (and rising), Labour 26% (stable), the Liberal Democrats 17% and the Brexit party with 11% (both declining), it would nevertheless be rash to assume a Conservative win. Having said this, it probably IS now the case that a ‘hard Brexit’ is very unlikely, meaning sterling and UK assets are less vulnerable to this scenario; it is probably the scenario that sees Jeremy Corbyn in Downing Street that the market now fears most.
The third factor responsible for October’s apparent strength was the Federal Reserve. Economic data underpinned the picture of continued deterioration in the U.S., in particular in the manufacturing sector. On the back of this, interest rates were cut by 25 basis points for the third time this year. The hope now is that this is sufficient to support the consumer sector which had been proving remarkably resilient but which has recently begun to show potential cracks, with consumer confidence easing and a slowing rate of job creation. Given the critical importance of central bank stimulus in supporting asset prices, expectations of what the world’s most important one will do next is hugely significant. The last week has seen U.S. 10 year yields drifting back towards 2%, from 1.5% a month ago, and this reflects the fact that the baseline view now is that little further support can be expected from the Fed, in the short term at least.
In other words, then, October was a month where the market took the “glass half full” view point, even though the contents of the glass were, in reality, very little changed. The strength of the headline (equity market) figures also fails to reflect the fact that across the world there is an increasing number of volatile sovereign situations, be it Hong Kong, Spain or, in particular, Latin America. The polls proved accurate in Argentina, with the Peronist Alberto Fernandez convincingly beating pro-business Mauricio Macri, albeit by a slightly smaller margin (8%) than expected. Although Fernandez has thus far talked in terms of maturity extensions for bonds, rather than actual write-downs, we believe that the latter course will eventually prove necessary. It is not just Argentina (and Venezuela) though: the continent which, until not long ago, was the strongest overweight for investors, has seen steadily spreading unrest. Protesters in Bolivia have taken to the streets alleging electoral fraud in the recent general election (and President Evo Morales has now resigned); in Peru congress has been dissolved as they struggle with a constitutional crisis; Ecuador’s government remains under pressure from a populace pushing back against IMF-required fiscal restraint and even Chile, the highest-rated sovereign on the continent, is now being rocked as citizens demand a greater dividend from their supposed economic prosperity, seeking better pensions, healthcare, education and public transport.
Similarly, Lebanon’s bonds have traded down form the mid-70s to the mid-50s over the last few months, gathering pace in October as the situation has become increasingly violent, Prime Minister Saad Hariri resigning and with commentators now asking whether a new Arab Spring may be building in the region.
What is interesting to us is that the common denominator in each of these separate situations is that they are all, at root, politically-based. There is, of course, often a close connection between economic hardship and the call for political change but the big picture is very much consistent with a theme that we have discussed here before: that of fracturing globalism and of increasingly protectionist sovereign states, battling to retain their piece of a global pie which, if not actually shrinking , is undoubtedly growing at a significantly slower pace than has been the case over the last decade.
The good news, though, is that the world economy IS still growing and, indeed, this is being driven by emerging economies. Whilst global growth is likely to show a gain of just 3.0% this year, its lowest level since 2008/09, the IMF now expects to see a pick-up in this figure to 3.4% for 2020, “reflectingprimarily a projected improvement in economic performance in a number of emerging markets in Latin America, the Middle East and emerging and developing Europe”.
As emerging credit markets have factored in very low treasury yields, two interesting phenomena have developed. Firstly, whilst outright yields have trended lower over the year, the same is not true for SPREADS.
It is therefore not surprising to find that those EM bonds with higher spreads look very compelling vs those further up the ratings spectrum.
Against the backdrop of increasing dispersion within the asset class, in most cases due to developing political factors, the importance of stock-selection is critical – but there IS value and, with the team’s specialist experience in distinguishing between surmountable, short-term volatility and fundamentally deteriorating economies, we are looking forward with relish to the opportunities that such a market creates.
We are also delighted to welcome James Edwards to the team, who will be leading all aspects of our marketing and investor relations going forward. James brings 30 years of Emerging Markets experience in roles including both investing and capital raising.
Please see the website for performance updates www.horatius.co.uk
This communication is for information purposes only and not intended to be viewed as independent investment research. It is not an invitation to buy or sell any of the securities or fund(s) referred to in the document and is not a personal recommendation or advice on investments, taxation or on any other matter. The prospectuses and supplements of the funds are the only authorised documents for offering of shares of the funds and these may only be distributed in accordance with the laws and regulations of each appropriate jurisdiction in which any potential investor resides.
This communication has been prepared by Horatius Capital Limited which is an AppointedRepresentative of Privium Fund Management (UK) Limited (“Privium”). Privium is authorised and regulated by the Financial Conduct Authority (“FCA”) in the United Kingdom. It is not intended fordistribution to or use by any person or entity in any jurisdiction or country where such distribution or use would be contrary to local law or regulation. Within the EEA, the fund is only available to Professional Investors as defined by local Member State law and regulation. Outside the EEA, the fund is only available to Professional Clients or Eligible Counterparties as defined by the FCA, and in compliance with local law. This communication is not intended for distribution in the United States(“US”) or for the account of US persons, as defined in the Securities Act of 1933, as amended, except to persons who are “Accredited Investors”, as defined in that Act and “Qualified Purchasers” asdefined in the Investment Company Act of 1940, as amended. It is not intended for distribution to retail clients.
The representative in Switzerland is ARM Swiss Representatives SA, Route de Cité-Ouest 2, 1196 Gland, Switzerland. The paying agent in Switzerland is Banque Heritage. The Prospectus, the Articles of Association and annual financial statements can be obtained free of charge from the representative in Switzerland. The place of performance and jurisdiction is the registered office of the representative in Switzerland with regards to the Shares distributed in and from Switzerland.
We believe the information in the document is based on reliable sources, but its accuracy cannot be guaranteed. The views expressed are the views of Horatius Capital Limited at time of publication andmay change. Where this document contains “forward-looking” information, including estimates,projections and subjective judgment and analysis, no representation is made as to their accuracy or that these projections will be realised. Neither Horatius Capital Limited nor Privium are liable for any losses relating to the accuracy, completeness or use of information in this communication, including any consequential loss. Where comparisons are made to an index, this is for information only and should not be interpreted to mean that there is a correlation between the portfolio and the index.Past performance does not predict future results and the capital value of the fund’s investments andthe income generated can fluctuate. Where investments are exposed to currencies other than the base currency of the fund, they may be subject to foreign exchange rate fluctuations.
The registered office of Privium is The Shard, 24th Floor, 32 London Bridge Street, London, SE1 9SG. Copyright©2019, Horatius Capital Limited. All rights reserved.
Horatius Capital Limited Registered Company No. 10436077 Registered Address 22 Chancery Lane, London, WC2A 1LS, United Kingdom Horatius Capital Limited is an Appointed Representative of Privium Fund Management (UK) Limited, Authorised & Regulated by the Financial Conduct Authority