Market Reviewas of 06/30/2015

Major themes in the second quarter that proved influential to emerging markets (EM) were a dovish U.S. Federal Reserve (Fed), the euro-reflationary trade, and rising core interest rates.

The second quarter started with euro appreciation following a substantial U.S. dollar rally, which began in the summer of 2014, up until March 2015. The U.S. dollar started to give back previous gains on disappointing U.S. growth in the first quarter, with gross domestic product (GDP) falling into negative territory and lower growth indications for the second quarter.  The Fed signaled that the timing of the first interest rate hike likely will be pushed farther back to September, which was a shift from the previously expected timeframe of mid-June. 

Europe saw stronger growth numbers this quarter and, most important, a pickup in inflation. The euro-reflationary trade was the predominant factor in the currency markets in April, when the euro strengthened against the U.S. dollar; however, EM currencies did not benefit because growth in the U.S. and China continued to disappoint. Overall, EM currencies traded sideways, depreciating slightly versus the U.S. dollar. 


German bund rates hit a 10-year low in April, and have ­­increased 100 basis points since then.  U.S. rates generally have followed European rates, while EM local rates have risen, but not to the extent seen in the United States and Germany. 

Growth and inflation remained subdued throughout the EM universe during the quarter.  As a whole, EM central banks eased monetary policy slightly in the second quarter, but monetary easing was significantly reduced from the levels seen later in 2014 and the first quarter of 2015. There were not many EM-specific themes in the market this quarter, in terms of currency trading, but what likely aided performance was the market realization that the eventual rate hikes in the United States will be gradual. This effectively diminished some of the reactions of EM securities related to the Fed rate hike fears; it remains to be seen whether this trend will continue.

Toward the end of the quarter, Greece took center stage for many market participants as a market driver. Although emerging markets haven’t yet been affected significantly by Greek events, the potential exists for Greece to become a more important driver as the third quarter of 2015 commences.   

The Barclays Global Emerging Markets Strategy (GEMS) Index1 (a general proxy for the emerging markets currency asset class) returned 0.57% for the three-month period ended June 30, 2015, compared with -3.55% in the first quarter of 2015.    

Fund Review as of 06/30/2015

The Fund returned 0.13%, reflecting performance at net asset value (NAV) of Class A shares, with all distributions reinvested, for the three-month period ended June 30, 2015. The Fund’s benchmark, the Barclays Global Emerging Market Strategy (GEMS) Index, returned 0.57% in the same period. The Fund’s average annual total returns, which reflect performance at the maximum 2.25% sales charge applicable to Class A share investments and include the reinvestment of all distributions, as of June 30, 2015, are: one year: -13.12%; five years: -0.19%; and 10 years: 1.23%. Expense ratio: 0.98%.

Performance data quoted represent past performance, which is no guarantee of future results. Current performance may be higher or lower than the performance data quoted. The investment return and principal value of an investment in the fund will fluctuate so that shares, on any given day or when redeemed, may be worth more or less than their original cost. To obtain performance data current to the most recent month-end call Lord Abbett at 888-522-2388 or visit us at

The Fund’s positioning in European currencies was the most significant detriment to relative performance in the second quarter of 2015. As the euro rallied early on during the period, we significantly reduced our exposure to the euro and currencies in both Poland and Hungary. These currencies, however, continued to rally versus the U.S. dollar, as market participants began unwinding hedged positions, thus increasing demand and buoying the value of euro-tied currencies. We also continued to position the Fund to benefit from improving domestic growth cycles in countries such as Mexico, Chile, and South Korea. However, the market did not reward improving growth prospects this quarter, and positions in these countries hurt relative performance. The Mexican peso was appealing during the period due to increased economic reform and a supportive Mexican central bank that had become increasingly hawkish. Normally, a stronger Chinese economy is beneficial to the Chilean peso as net exports in Chile increase. However, despite significant Chilean peso depreciation in 2014, improvement in economic growth and increased Chinese stimulus failed to support the currency to the extent we anticipated.  South Korea maintains a significant trade surplus, as it benefited from a rebound in European growth. This, combined with increased economic strength in Japan, should have benefited the South Korean won; however, the opposite occurred and the currency depreciated.

Underweight positions to currencies across Asia contributed positively to Fund performance during the second quarter. This region had outperformed recently on increased U.S. dollar strength, as Asian currencies typically are more heavily managed to moves in the U.S. dollar. Correctly anticipating an end to the outperformance of currencies in Thailand and the Philippines, we maintained underweights to their currencies, which helped relative performance. We also maintained an overweight position in the Indonesian rupiah. The rupiah was a positive contributor to relative performance, as the currency appreciated in the second quarter. We correctly anticipated stronger trade numbers and a lower current account deficit, and, in contrast to market expectations, we did not anticipate an interest rate cut from the Indonesian central bank, which ultimately did not occur. 

Please refer to under the “Portfolio” tab for a complete list of holdings of the Fund, including the securities discussed above.


The Fed continues to dominate headlines across financial markets. While we do not anticipate persistent or excessive volatility when Fed rate hikes finally commence, there certainly is a possibility for short-term fluctuations. We believe that the second half of 2015 should prove stronger for emerging markets currencies than the first half of the year. We have seen growth, inflation and trade numbers improve steadily as we entered the third quarter, which should lead to currency appreciation.

The weather phenomenon El Niño likely will affect emerging-markets currencies in the third quarter of the year. El Niño is caused by cyclical warming of the Pacific Ocean and poses a significant threat to many emerging economies. Higher temperatures and drought could fuel hikes in food prices and, subsequently, inflation in countries across Latin America and Asia, where food represents a significant percentage of consumer price inflation. As inflation is generally positive for currencies in countries that have room to tighten monetary policy, El Niño could actually prove a tailwind for the currencies of many countries across those areas affected.

Although we remain largely positive on the outlook for emerging market currencies in the latter half of the year, there are a number of market events worth monitoring. In particular, we maintain overweight positions in areas that we anticipate will experience higher inflation and improved growth prospects. More clarity surrounding Greece may be necessary for market participants to fully reward those countries that are well positioned for economic improvement. The Fed also remains critical as any surprises, both positive and negative, still weigh heavily on the overall performance of the currency market. 

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