Emerging Market Bond Fund Euro Accumulator Institutional

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 Sub-Fund in Emerging Market 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

January 2025

Introduction

Emerging market (EM) credit started the year strongly, a stark contrast to the downturn observed towards the end of 2024, which had partially diminished the year’s positive performance. This late-year decline was triggered by widespread investor risk aversion preceding the US presidential election on November 5th, stemming from concerns about the protectionist policies of the incoming president, including potential trade tariffs.

Continuing tariff risks following the inauguration placed a burden on markets. Mexico was particularly vulnerable to targeted tariffs, as it was held accountable for commitments to curb illegal immigration and the flow of fentanyl and other drugs into the US. The threatened 25% tariffs on all Mexican goods were temporarily suspended after a conversation between US and Mexican leaders, during which the latter pledged to increase law enforcement presence on the US border to combat drug trafficking.

Regarding policy affecting EM hard currency debt, the Federal Reserve maintained interest rates steady in the 4.25–4.5% range, despite political pressure to lower them. A weaker US dollar, beneficial to EM nations, persisted. The Brazilian real further appreciated against the dollar during the month, following a 100bp interest rate increase, as inflation remained above the central bank’s target at the end of 2024.

EM corporate credit returned approximately 1.12% in January.

Market environment and performance

Though government intervention briefly raised hopes, the lack of concrete plans and a series of disappointing economic figures have dampened confidence once again.  Positive news from the technology sector, particularly the announcement that China’s DeepSeek developed a cost-effective generative AI model comparable to market leaders, provided a renewed sense of optimism that largely outweighed the impact of the 10% tariff imposed on Chinese imports.

In economic numbers, China’s General Composite PMI eased to 51.1 in January, from 51.4 in the previous month, marking the lowest print since September due to quicker manufacturing output growth failing to offset slower growth in services activity. Still, it was the 15th month of growth in private sector activity, with new orders slowing while employment fell the most in over two years due to a lack of capacity pressure. 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.

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 13.25% in January, confirming its previous signal of further tightening if inflation risks persist. Conversely, Mexico saw inflation decelerating further, hitting a four-year low of 3.59% and paving the way for the Bank of Mexico to ease policy further in its February meeting.

Fund performance

The CC Emerging Market Bond Fund rose 0.58% in January, reflecting the moves observed across credit markets.

In January, the portfolio manager, seeking to reduce the portfolio’s exposure to nations which may be directly impacted from the imposition of tariffs, increase income, and overall reduce the portfolio’s sensitivity to interest rate changes, this due to the possibility of a higher-for-longer stance implemented by the Federal Reserve. To achieve the first objective, the manager reduced the fund’s exposure to Petroleos Mexicanos, Nemak. Proceeds were instead allocated to bonds issued by the Government of Saudi and Abu Dhabi National Energy. The reasoning behind such geographical shift is two-fold, the lower risk of tariff imposition and the currency being pegged to that of dollar, thus not impacted by any currency fluctuations. Additionally, over the month we increased our exposure to higher coupon paying bonds, whilst also reducing the portfolio duration, by taking positions in names we are already exposed to, yet shifting from longer dated issues to shorter. Names include: Petrobras, the Federal Republic of Brazil, Banco Santander, and Turkcell Iletisim – a leading mobile phone operator in Turkey. By doing so we will be increasing the income yield of the portfolio, whilst reducing the sensitivity, which may conversely lead to adverse capital fluctuations.

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.