Dear investors,
Recent developments linked to the implementation of new tariffs by the Trump administration have rekindled trade tensions and heightened market uncertainty. This situation is fuelling questions about the trajectory of global growth, the risk of recession in the United States, and future inflationary dynamics, with ambivalent effects on US rates.
We would like to share with you our analysis of recent developments and their potential impact on emerging corporate bonds - and therefore on your exposure through our IVO funds.
Emerging markets summary (source: JP Morgan)
- Average tariffs announced: 18.3%, weighted by imports, but the actual increase in the tariff rate would be more like 12.6 percentage points, due to expected exemptions for around 1,000 billion USD of imports (1/3 of the total), including :
o USMCA-compliant products (minimum local content)
o Products under SEC investigation (copper, wood, pharmaceuticals, semiconductors, critical minerals)
o Energy products
o Products with at least 20% US content
- Second tariff wave scheduled for April 9:
o Tariffs proportional to bilateral trade deficit
o Possible increases of up to 45% for countries like Vietnam
o Possible introduction of a floor rate of 10%.
Our reading of the situation:
Yesterday's announcements do not mark the end of this protectionist sequence. On the contrary, they
pave the way for more intensive bilateral negotiations with the United States.
As a result, it's not so much the level of tariffs (10% or 20%) that's important, but who will be able to charge them?
and how long it will take.
In the event of a sell-off, we believe that this would above all be a buying opportunity - both for technical reasons specific to the bond market, as described below, and because all the analyses converge on the same idea: none of this seems structurally sustainable.
"The real pain of this event will be the breaking of the capital flow agreement we had with the rest of the world," said Blitz. "This idea that you can break trade, not break the flow of capital, is a fantasy."
What are the consequences?
Against this backdrop, global investors shied away from risk, resulting in a week-on-week rally of around 30 basis points on 10-year US Treasuries and 13 basis points on the German bund.
Commodities, including oil, also reacted negatively due to a significant
adjustment of global growth expectations.
What are the risks and what are the responses?
As always in bond management, we believe it is essential to make a clear distinction between
different types of risk :
- First, credit risk, i.e. a company's ability to honor its debt (solvency);
- secondly, liquidity risk, which may arise if a company has to refinance on a market in "risk-off" mode, with temporarily restricted access ;
- lastly, mark-to-market risk, linked to a generalized repricing of the price of risk, with no direct link to the credit quality of issuers.
Credit risk: limited impact at this stage
On the one hand, from a macroeconomic point of view, we note that this new salvo of tariffs is not specifically directed against emerging countries, but is global in scope.
More specifically, we note that the two regions most impacted by Washington's tariff policies are Asia and the European Union - two geographic zones where we don't actually have significant exposure in our portfolios - and that Latin America and the Africa-Middle East region, which account for over three-quarters of our bond portfolio exposure, seem less targeted by the US administration.
It should also be remembered that, in most emerging countries, the commercial hegemony of the United States is not as strong as it was or may be today with developed countries. China's share of emerging country exports has risen considerably, to the detriment of that of the United States (with a few exceptions, such as Mexico).
On the other hand, from the point of view of emerging companies' direct credit exposure to tariffs, it must first be said that the proportion of companies immediately affected by tariffs is very low. According to JP Morgan, only 28% of companies in the CEMBI BD (emerging companies index) would be significantly affected, and 60% would suffer only a minimal direct impact.
What's more, the balance sheets of emerging companies are in a rather solid starting position, and the highly diversified universe of over 60 countries and 13 sectors is an asset in terms of diversification and decorrelation for credit investors looking for idiosyncratic drivers.
Indeed, the financial strength of issuers is central to the investment thesis for the asset class. The consequences of tariffs, whether direct or indirect, do not call into question a company's ability to service its debt. In the event of a shock, shareholders will bear the brunt of the impact, through a potential revision of profit trajectories and valuation multiples. Secondly, solid margins and moderate debt levels will enable companies to withstand headwinds. Only as a last resort, and in extreme cases, could these tensions become a solvency issue. At this stage, we do not anticipate such a scenario.
The companies in our portfolio have a moderate level of debt and a solid capacity to absorb rising costs, thanks to high operating margins. This structural advantage is decisive when the cycle turns around. Should the macroeconomic environment deteriorate, we believe that emerging market companies are, on the whole, better positioned than most to cope.
Net gearing of HY issuers (Source JP Morgan)
Debt service (Ebitda / Interest) of EM Corporates (Source JP Morgan)
Liquidity risk: limited impact, as refinancing securities are not a core component of our portfolio. We prefer issuers whose maturities are under control and who do not depend on immediate access to the market to ensure their operational continuity.
Volatility risk (mark-to-market): an issue of sentiment rather than fundamentals in our case.
The current volatility may lead to a temporary widening of spreads, which does not reflect a risk of bankruptcy, but rather a generalized repricing of the price of risk. This phenomenon may have cascading effects, starting with the US High Yield segment, but also on commodity prices, and sovereign spreads in countries most vulnerable to a revision of global growth. In many cases, fiscal paths hitherto deemed acceptable thanks to robust growth could be reconsidered if this dynamic were to reverse.
As a long-only fund, we cannot totally neutralize mark-to-market risk, just as no active strategy can claim to generate sustainable alpha without assuming some risk.
As mentioned above, we believe we are not exposed to any significant credit risks, either in terms of solvency or liquidity - thanks to the rigor of our investment universe. On the other hand, we are not immune to an adjustment in valuation levels, which may be short-lived (if risk or market sentiment normalizes), or more lasting (if a new risk environment prevails).
This risk of price volatility needs to be seen in the context of the bond market: in the absence of a concrete increase in the risk of default, any fall in price should be seen as an opportunity to buy, as the bond has what we might call the "elasticity of return to par", i.e. a natural vocation to return to its redemption value at maturity.
We have fully integrated this mark-to-market risk into our portfolio construction over the last few months, as we reiterated in our recent Outlook 2025 presentations. As a result, we have adapted our positioning, strengthening credit quality, reducing duration, increasing our cash holdings and further diversifying our exposures.
Our current positioning is defensive but opportunistic, with :
- A reduction in B-rated exposures, in favor of BB ratings
- Reduced duration on IVO EMCD (from 4.5 to ~3.7 today)
- A comfortable cash position (around 8% today)
- Increased country diversification
- Maintaining a high level of bond carry (over 9% in USD by 3/4/2025), a real volatility buffer
Let's add another important element of context concerning the mark-to-market risk in 2025: the "US Treasury interest rate" component built into our bonds.
As our securities are denominated in USD (with full currency hedging for euro investors), their yield is made up of :
- US Treasuries yield (risk-free rate),
- the sovereign spread of the issuer's country of domicile,
- and, in most cases, a corporate spread (often called spread-to-sovereign).
This Treasury component, which is currently high (around 4% on 5-year maturities), plays an important role in the portfolio's resilience to price volatility:
- Macroeconomic shock-absorber effect: the recent change in the global growth narrative (with fears of a slowdown on the rise) is driving down US yields, offsetting concerns about inflation and tariffs. In contrast to the 2008-2022 period, when bonds were predominantly spread-valued (with no real interest-rate component), the current presence of a genuine risk-free interest-rate base is restoring the bond product's role as a hedge and macro stabilizer.
- Effect on total return: this Treasury component mechanically increases the overall return on our bond portfolios. However, as we are often reminded, the best volatility buffer in a bond portfolio is carry.
Regional focus:
Asia: We have limited exposure to the region (7.7% of the portfolio), mainly in India, with only 1.2% in China (on very specific investment themes). Historically, Asian countries have relied heavily on a protectionist, export-oriented model, generating large trade surpluses with the United States. The most exposed to these new tariffs are Vietnam, Taiwan and South Korea (where we have no exposure), as their exports represent between 40% and 83% of GDP, with the US buying up to 30% of their production. Conversely, Indonesia, India and China have economies more focused on domestic demand (only 10-15% of GDP linked to foreign trade) and should therefore be less directly affected.
Latin America: 47% of our flagship strategy is exposed to Latin American credits. Trump's tariff announcements are relatively benign for the region: USMCA-compliant exports are exempt, and the rest of Latin America is affected by a tariff limited to 10%. On net, we consider this development to be slightly positive in relative terms for Brazil and Mexico. Within the region, Chile and Peru are more vulnerable due to their commodity exports to China (mainly copper), but we have no exposure to the region's mining companies, and very little exposure to Chile and Peru. Moreover, given the moderation of tariffs for Latin America, the risks of retaliation also appear limited.
Exposure to the energy sector: Our flagship strategy has a 20.3% exposure (as at 03/31/2025) to oil & gas credits. We note that energy products have been excluded from recent tariff announcements. However, the downward revision of global growth prospects will have a negative impact on oil demand. Specifically, we estimate that global oil demand could be 200 to 300 thousand barrels per day lower in 2025 than projected growth of 1.2 million barrels per day, putting downward pressure on oil prices in the short term.
Against this backdrop, we believe that the IVO EMCD portfolio will remain fundamentally credit resilient, even if we observe a negative mark-to-market impact on this oil-exposed energy pocket.
It should be noted that almost 12% of our 20% exposure to the energy sector is mitigated by credits benefiting :
- long-term fixed-price contracts,
- oil services activities with medium-term contracts (less sensitive to crude oil price variations),
- or links with sovereign theses, rather than directly with oil price volatility.
For the remaining 8% of the portfolio, more directly exposed to oil price volatility, we prefer defensive issuers with solid fundamentals, low production costs and the ability to generate cash flow over the cycle.
Although this segment is likely to experience mark-to-market volatility, we are convinced that the fundamental quality of issuers will limit credit risk. This conviction is based in particular on our experience during the oil counter-shock of April 2020, when Brent crude hit record lows (up to $20 vs. around $70 today), as well as the subsequent recovery period.
Conclusion: active caution and the search for opportunities
We remain vigilant to the possibility of a generalized risk-off. However, in the bond universe, any fall in prices - in the absence of an increase in default risk - should be seen as a buying opportunity: bonds have what we might call "elasticity of return to par", i.e. a natural vocation to return to their redemption value at maturity.
Unlike equities, bonds are not dependent on uncontrollable external factors that can have a lasting impact on prices. The fact that they have a defined maturity and contractual redemption value makes them a unique asset to hold when the market is offering them at a discount.
With this in mind :
- We keep our finger on the pulse of the market.
- We plan to strengthen our cash position by disposing of certain resistant lines, so as to be able to reposition ourselves rapidly.
- Without being an absolute return fund using derivatives, our aim remains to protect relative performance during periods of stress, by arbitraging the most resilient positions towards those temporarily affected by the sell-off.
Our portfolio is structured to weather turbulence with prudence and resilience. To date, our fundamentals remain solid, and our geographical and qualitative positioning is an asset in this new market regime.
We would like to thank you for your continued confidence in us, and look forward to hearing from you.
IVO TEAM
DISCLAIMER THIS DOCUMENT DOES NOT CONSTITUTE FINANCIAL ADVICE:
The information provided reflects the opinion of IVO Capital Partners at the date of this publication. The information contained in this document is not intended to be understood or interpreted as financial advice. It has been shared for information purposes only, does not constitute advertising and should not be construed as a solicitation, offer, invitation or inducement to buy or sell securities or related financial instruments in any jurisdiction whatsoever. CONFIDENTIALITY: the information is strictly confidential and may not be reproduced, redistributed, disclosed or transmitted to any other person, directly or indirectly. You may not copy, reproduce, distribute, publish, display, perform, modify, create derivative works from, transmit or in any way exploit any such content, nor may you distribute any such content over any network, including a local area network, sell or offer for sale any such content, or use any such content to construct any type of database.
