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

February 2025

Introduction

Emerging market (EM) credit exhibited robust performance in early 2025, recovering from the late 2024 sell-off. This prior downturn, which eroded prior gains, was largely attributed to heightened risk aversion preceding the US presidential election. Market participants priced in potential downside risks stemming from anticipated protectionist policies, notably trade tariffs.

Post-inauguration, tariff risk remained a significant overhang, with Mexico facing specific vulnerability due to its role in addressing US border security concerns. The threatened 25% tariffs on Mexican imports, a direct response to perceived policy shortcomings, were temporarily mitigated following diplomatic interventions and commitments to enhanced border enforcement. This episode underscores the sensitivity of EM credit to geopolitical risks and their potential for rapid repricing.

February saw a continuation of positive momentum.

Despite persistent inflationary risks, including the potential impact of tariffs and stronger-than-anticipated inflation data, global bond markets reacted positively to weakening US sentiment indicators and escalating growth concerns. This led to a 33bps decline in the US 10-year Treasury yield, closing at 4.21%, and a corresponding depreciation of the USD. This provided a significant tailwind for EM debt, as evidenced by a 1.34% return in EM corporate credit for the month.

Market environment and performance

Lack of clarity, arising from the dynamic and continuously evolving environment within the geopolitical sphere, are giving rise to uncertainty. The re-election of Donald Trump into office meant that the neighbouring countries will have to deal with the possibility of tariff imposition. Mexico and Canada, on the basis of the lack of controls surrounding imports of fentanyl and unfair trade practices, have certainly started to feel the below, with threats of tariffs being laid out. China too were subject to such trade tariffs, albeit to a lesser extent, with trump thus far taking a more cautious stance, imposing only a 10% tariff on Chinese imports. The PBoC – facing persistent headwinds to its economic recovery – has demonstrated restraint, favouring diplomatic engagement over aggressive retaliatory trade actions which may ultimately have adverse effects on domestic consumption.

In economic numbers, China’s General Composite PMI increased to 51.5 in February 2025 from 51.1 in the previous month, marking the highest reading since last November. Still, it was the 16th month of growth in private sector activity, with new orders solidifying, supported by modest growth in output across both sectors. Meanwhile, China’s annual inflation rate climbed to 0.5% in January from 0.1% in December, surpassing market expectations of 0.4%. This marked the highest level since August 2024, driven by seasonal effects from the Lunar New Year at the end of the month. This also reflected the impact of recent government stimulus measures and the central bank’s accommodative monetary policy to support the economy.

Latin America’s economic landscape presents a mixed picture. While earlier concerns regarding resurgent inflation were prevalent, recent data indicates a potential disinflationary trend, prompting a reassessment of future monetary policy adjustments. Notably, Brazil’s inflation rate moderated to 4.56% from 4.83%, aligning with market forecasts and reaching its lowest level since September, amidst signs of slowing economic growth. This development suggests a potential shift in the Brazilian monetary policy stance.

In Asia, monetary policy is also responding to evolving economic conditions. The Reserve Bank of India (RBI) implemented a 25bps repo rate cut to 6.25% in February, the first reduction in nearly five years. The RBI’s stated neutral stance aims to support economic growth. Conversely, Thailand and Indonesia experienced the most significant market declines in the region, reflecting investor concerns regarding weakening growth prospects.

Fund performance

The CC Emerging Market Bond Fund delivered a 1.35% return in February, mirroring the broader positive trend in credit markets.

In response to ongoing market volatility and expectations of a sustained period of elevated Federal Reserve policy rates, the portfolio manager continued to dynamically manage risk and yield. Following the previous month’s reduction in exposure to tariff-sensitive issuers, the focus shifted to enhancing income yield and mitigating interest rate duration

To achieve these objectives, the manager strategically reallocated capital. Proceeds from the sale of the iShares Emerging Markets Bond UCITS ETF were redeployed to increase direct corporate bond exposures, specifically adding positions in Standard Chartered, Vedanta Resources, and HSBC Holdings. To further optimize income yield, a duration-neutral swap was executed, replacing a Polish bond with a 4.88% coupon with a newer issue yielding 5.38%. This swap effectively maintained the portfolio’s duration profile while enhancing its income generation.

Market and investment outlook

Looking forward, Federal Reserve policy decisions and the broader global interest rate trajectory will remain pivotal factors. A shift towards a more dovish Fed stance could trigger further USD depreciation, a trend already observed in recent weeks. The USD’s recent weakening is attributable to concerning US private sector employment data, which raised concerns regarding labor market resilience, and escalating trade tensions. Retaliatory tariffs imposed by Canada, Mexico, and China in response to US actions have amplified global growth risks and exerted downward pressure on the USD.

For the CC Emerging Market Bond Fund, the portfolio manager will maintain a dynamic approach, actively assessing the evolving market landscape to capitalize on attractive credit opportunities. Consistent with recent strategies, portfolio adjustments will be made to align with prevailing yield conditions and optimize duration, as deemed prudent. Furthermore, the manager will vigilantly monitor the geopolitical landscape within emerging markets, particularly the potential for escalating tensions, which continue to present a source of market uncertainty.