Emerging Market Bond Fund USD Accumulator

The Fund aims to maximise the total level of return through investment, in a diversified portfolio of Emerging Market Corporate and Government fixed income securities as well as up to 15% of the Net Assets of the Fund in EM equities. In pursuing this objective, the Investment Manager shall invest primarily in a diversified portfolio of Emerging Market bonds rated at the time of investment BBB+ to CCC+ by S&P, or in bonds determined to be of comparable quality. The Fund can also invest up to 10% of its assets in Non-Rated bond issues and up to 30% of its assets in non emerging market issuers.

The Fund is actively managed, not managed by reference to any index.

The Investment Manager of the CC High Income Bond Funds – EUR and USD has the duty to ensure that the underlying investments of the funds are well diversified. According to the prospectus, the investment manager has to abide by a number of investment restrictions to safeguard the value of the assets

• Minimum Credit Rating CCC+ (or equivalent)
• Up to 10% in Non-Rated Bonds
• Average Credit Quality of B- (or equivalent)
• Emerging Market Issuers as per MSCI Emerging and Frontier
• Up to 15% in Emerging Market Equities
• Use of FDIs for hedging purposes only
• No limit on exposure to CIS
• Up to 30% in Non Emerging Market Issuers

December 2024

Introduction

Emerging market (EM) credit, despite a strong full-year performance, saw returns partially eroded in the final quarter of 2024. This pause was triggered by widespread investor risk-aversion ahead of the US presidential election on November 5th, driven by concerns over the protectionist policies of the President-elect, including potential trade tariffs. Furthermore, the US Federal Reserve (Fed) cut interest rates three times between September and the end of December 2024. In its most recent meeting, Fed Chair Jerome Powell indicated that persistent inflation may necessitate fewer rate cuts in 2025 than previously anticipated. The Fed’s “dot plot”, previously projecting a full percentage point reduction now suggests only two rate cuts in 2025, totalling 50bp. This has further strengthened the US dollar, creating a significant headwind for emerging market credit.

Specific country-level news further weakened EM currencies.  The Brazilian real was among the worst-performing currencies, as the local currency weakened amidst rising concerns over the country’s fiscal outlook. In China, the lack of further details on the policy stimulus measures announced in September, coupled with investor concerns regarding the impact of proposed trade tariffs on Chinese exports, exerted a negative influence.

In numbers, EM corporate credit returned approximately -0.45% in December. On a year-to-date basis, emerging market corporate credit saw returns of 11.93%, with income return contributing c. 7.2%.

Market environment and performance

While China’s economy has shown intermittent signs of recovery, the real estate market has been a persistent drag. Government’s efforts briefly ignited optimism, however, the absence of concrete details and a string of weak economic data has led to a renewed decline in sentiment. Adding to the existing challenges, Donald Trump’s re-election has intensified concerns among investors about the possibility of higher tariffs on Chinese exports to the U.S., further exacerbating trade tensions and undermining market confidence.

In economic numbers, China’s General Composite PMI eased to 51.4 in December, from 52.3 in the previous month, marking the lowest print since September as the services sector saw the highest growth since May but manufacturing activity rose less than expected. Regarding demand, new order growth slowed due to a renewed downturn in exports. Meanwhile, workforce capacity continued to shrink. December’s annual inflation rate eased to 0.1% from 0.2% in the previous month, aligning with market estimates. This slowdown underscored mounting deflation risks in the country, despite government stimulus measures and the central bank’s supportive monetary policy stance.

The economic landscape of Latin America remains multifaceted. While inflation had been showing signs of cooling in some economies, it has recently resurfaced in others, necessitating adjustments to monetary policies. In Brazil, the Central Bank raised the Selic rate by 100bp to 12.25% in December, with plans for further tightening if inflation risks persist. Conversely, the Bank of Mexico lowered its benchmark interest rate to 10.0% in December 2024, as expected. This aligns with global disinflation trends, though inflation in major economies remains persistent, particularly in services.

Fund performance

In December, the CC Emerging Market Bond Fund realized a loss of 0.98%. Throughout the month, the Manager – having increased the portfolio’s duration in a gradual manner and locked in higher coupons prior to policy easing – maintained its allocation.

Market and investment outlook

Looking ahead, the evolving global interest rate environment, particularly Federal Reserve decisions, will remain a critical factor to monitor. A dovish Fed stance would be beneficial, potentially leading to a weaker US dollar, which has been steadily appreciating against domestic emerging market currencies. Conversely, persistent inflation, especially considering the potential inflationary impact of policies implemented during Trump’s re-election, could compel the Fed to adopt a more hawkish stance.

A prolonged period of higher interest rates would pose a significant challenge to emerging market economies. This scenario could deter foreign investment flows seeking higher returns elsewhere and increase refinancing costs for companies with substantial foreign currency debt.

With respect to the Emerging Market Bond Fund, the manager will continue to assess the market landscape and capitalize on appealing credit opportunities. Consistent with recent actions, the manager will continue to tailor the portfolio to match prevailing yield conditions, thus adjusting the portfolio’s overall duration as deemed prudent. This ongoing portfolio management process will be conducted while closely monitoring the political landscape within emerging markets and the potential escalation of geopolitical tensions, which to-date have alas endured.