Fund performance was positive during the quarter and the fund rose 3.14% in SEK. During the period, the market began to price out the aggressive expectations for interest rate cuts for many central banks in developed markets, and the US 10-year rate rose approximately 30 bp. The core inflation in many countries, including both emerging and developed markets, is moving slower than expected towards the inflation targets and economic data, particularly in the US, remains strong. Interest yields in emerging markets were therefore marginal during the quarter, driven by the high coupon rates, although rising interest rates in total had a negative impact on interest yields. The majority of the returns were therefore a result of stronger emerging market currencies against the SEK.
The overweight in exposure to Mexico and India were the strongest active and relative contributors, with primarily strong exchange rates. Interest rate movements in India and high yield rates in Mexico also contributed positively.
The exposure in supranational bonds issued in Turkish lira had the most negative impact due to unexpected inflation on the upside. The Turkish central bank hiked rates further and the key rate is currently 50 percent. However, the fund has an underweight exposure in relative terms to Turkey and will be retaining the positioning as the economic policy is tight and counteracts the high inflation. Valuations are attractive with low foreign ownership and very high yield rates.
The fund has a somewhat short duration, driven by a significant underweight in China but an overweight in Latin America (Mexico and Brazil).