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Multi Asset Funds - September 2018

Turkish bond collapse induces risk off approach to markets, with safe havens and defensive positioning being favoured.


  • Global growth expectations are beginning to fade somewhat as trade related uncertainty eats away at earlier optimism. But fiscal and monetary policy remains supportive so activity is likely to remain above trend for now.
  • US imposed sanctions on Turkey are triggering a collapse in value of the Turkish lira. Turkish 10 year bond yields hit a record high. Turmoil in Turkey triggers risk-off approach to other emerging markets (EM), with the EMBI spread rising to highest levels since 2016.
  • Raw commodity prices are beginning to feel the impact of trade war, with the CRB Raw Industrials index falling almost 4% in the month, now at the lowest levels since December 2016.
  • Despite worries, global equity markets eked out minor gains for the month with the MSCI AC index up 0.6%.
  • Brexit worries continue to weigh on UK sterling, with the weaker trend still in place, especially against US dollar as the acknowledged safe haven currency.
  • We continue to lower risk within our funds away from EM exposure towards defensive positioning, and maintained a slightly underweight equity position.

Market update

There are very few new developments in the markets, apart from the collapse in Turkish bonds and currency as a result of the sanctions applied by the US. This in turn induced a risk-off approach to markets, with safe havens and defensive positioning being favoured. This saw US Treasuries rally again, backing off the 3% level for 10 year yields.  EMBI spreads, on the other hand, again rose, widening in dramatic fashion almost 50 points in the month.

Emerging Markets have now become the central focus for markets as countries with vulnerabilities to external (hard currency) funding requirements come under renewed scrutiny. Consensus still appears to favour a scenario where these developments are only temporary, but the risk remains that one or more emerging markets may be pushed over the edge through significantly higher bond yields. In Turkey, for example, 10 year bond yields started 2018 at levels around 11.4%, and at the end of March were trading slightly above 12%. In the aftermath of the US sanctions they traded over 21% during August, which are the highest yields ever for Turkish bonds.

With that as the backdrop, it was only understandable that most markets struggled to stay positive and the MSCI All Countries index eked out a meagre 0.6% gain for the month. In fixed income space, the FTSE World Govt Bond Index was down 0.2%, saved from further losses by gains in developed market (DM) bonds which offset the emerging market losses.

Portfolio strategy

We maintained overall positioning between bonds versus equities, but opted to shift regional allocations towards more defensive positions. In particular, given rising risks in Europe, we moved to neutral there and increased exposure to the US, where our positioning falls more into a value style approach, whilst remaining overweight to Japan.  We had already reduced our bond position in Mexico and in August we elected to fully exit that position, with the proceeds moving into the DM sovereign space.