Research & Insight

The benchmark returned a small positive in US dollars in the final quarter of 2011 with risk assets bouncing back from large falls in value in September. Rexiter’s local currency emerging market debt portfolio has performed strongly over the last three months generating positive alpha in each. Both country and security selection contributed positively to these strong relative returns with Eastern Europe and Latin America the top performing regions.

North Korea announced at noon Seoul time yesterday that its leader Kim Jong Il, the Dear leader, had passed away of ‘exhaustion’ while on a domestic train trip on December 17. A flavour of North Korea can be garnered from the fact the state television announcer wept as they read the news, while thousands in the main square in Pyongyang chanted in unison and waved ‘Kimjongilia’, a flower named after the deceased leader. The son of Kim Il Sung (the Great Leader), Kim ruled North Korea for 17 years after coming to power in July 1994. The South Korean army and government were put on full alert and developments will be closely watched worldwide. Given the uncertainty it will unquestionably cause the market, the impact is clearly negative, at least in the short term. Having said that, history tells us not to panic. The most recent ‘flare ups’ were the North Korean torpedo attacks on a South Korean warship on 26 March 2010 (killing 46 sailors) and the firing of artillery shells on Yeonpyeong Island on 23rd November 2010 (killing 2 soldiers and 2 civilians). In both cases, the market digested concerns and regained pre-accident levels within a week. Post the announcement on Monday the Kospi index lost 3.4%, but regained some of that today. The Korean Won fell 1.6% to a 2 month low of 1177 per dollar but regained all of that today.

North Korea announced at noon Seoul time today that its leader Kim Jong Il, the Dear leader, had passed away of ‘exhaustion’ while on a domestic train trip two days ago on 17 December. A flavour of North Korea can be garnered from the fact the state television announcer wept as they read the news while thousands in the main square in Pyongyang chanted in unison and waved ‘Kimjongilia’, a flower named after the deceased leader. The son of Kim Il Sung (the Great Leader) Kim ruled North Korea for 17 years after coming to power in July 1994. The South Korean army and government were put on full alert and developments will be closely watched worldwide. Given the uncertainty it will unquestionably cause the market, the impact is clearly negative, at least in the short term. Having said that, history tells us not to panic. The most recent ‘flare ups’ were the North Korean torpedo attacks on a South Korean warship on 26 March 2010 (killing 46 sailors) and firing artillery shells on Yeonpyeong Island on 23rd November 2010 (killing 2 soldiers and 2 civilians) and then the market digested concerns and regained pre-accident levels within a week. Post the announcement today the Kospi index lost around 4% closing down 3.4%. The Korean Won fell 1.6% to a 2 month low of 1177 per dollar.

November brought yet another turn in the direction of performance for emerging markets local currency debt, with a down month following October’s recovery. With the exception of Peru, all countries within JP Morgan’s GBI EM Global Diversified index suffered losses over the month. The three month return is -8.04% although the 1 year return for the index remains positive at 2.84%. Despite the near term volatility in monthly returns, Rexiter’s strategy continues to add positively to performance, highlighting the non-directional dependency of its underlying positioning. Yet again this month the individual performance of country returns are widely dispersed due to the large amount of risk aversion that overshadows markets, with the European debt sustainability concerns. We reiterate our position that there are large amounts of implementation risk for any solutions presented by European policy makers.

The third quarter proved volatile for all risk assets, as investors struggled with assessing the impact of several as of yet unresolved developed market solvency issues. In August it was partisan politics in the US threatening to prevent the debt ceiling from being raised, through to September where consensus is growing in Europe that a restructuring in Greece (and perhaps elsewhere) is inevitable. These issues have spilled over into fears of another banking system crisis led by Europe’s undercapitalised banks and the sharp slowdown in global growth that such a crisis could precipitate. This latter scenario proved costly for emerging markets local currency debt as the asset class suffered its worst quarter since its inception in 2003; down 8.55% in USD terms. Rexiter outperformed by 80 basis points over this period. Interestingly however, lower growth expectations were reflected in bond prices with curves rallying across many of the benchmark countries, and the losses stemming entirely from FX. Only two countries in the benchmark posted positive total returns for the quarter: Indonesia where collapsing rates and a high yield more than offset a modest (-2.44%) currency loss, and Peru where the currency barely moved at all (-85bps).