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

October 2024

Introduction

Emerging market (EM) credit’s notable run, witnessed since the start of the year, came to a pause in October amid widespread investor de-risking ahead of the US presidential election on November 5th. Rising US bond yields and a stronger US dollar were notable headwinds for emerging market credit.

Indeed, stronger-than-expected US labour market data, underscored by robust non-farm payrolls, tempered market expectations for aggressive Federal Reserve rate cuts. At the same time, ongoing core inflationary pressures complicated the Fed’s efforts to balance its dual mandate of price stability and full employment. These factors, combined with concerns over potential post-election policy shifts, led to a recalibration of the Fed’s rate-cut trajectory, resulting in a market reassessment that reduced the likelihood of a 50bps cut in November. The uncertainty surrounding the US presidential election further contributed to investor de-risking. Despite a late-month dip, the former president maintained a lead in the polls, which fuelled additional selling in US Treasuries. Market participants grew increasingly concerned that a potential Republican victory could lead to inflationary policies, exacerbating the sell-off.

In numbers, EM corporate credit returned approximately -0.26% in October. Still, on a year-to-date basis, emerging market corporate credit saw returns of 11.84%, with income return contributing c. 6.0%.

Market environment and performance

While China’s economy has shown intermittent signs of recovery, the real estate market has been a persistent drag. The government’s initial efforts, including a modest interest rate cut in July, were insufficient to bolster sentiment. While a surprise monetary stimulus and expectations of further support, including potential fiscal measures, briefly ignited optimism, the absence of concrete details and string of weak economic data has led to a renewed decline in sentiment.

China’s General Composite PMI fell to 50.3 in September, missing market estimates of 50.5 and pointing to the lowest result since October 2023, as the manufacturing sector unexpectedly contracted while the service economy grew the least in a year. New orders dropped for the first time in near two years, though the fall was limited to the goods-producing sector. Meanwhile, employment levels fell, driven by reductions at manufacturers. On prices, input cost inflation eased to a 10-month low as manufacturing costs declined. This was while average charges fell at the most pronounced pace in over a year. September’s annual inflation rate fell to 0.4% from 0.6% in the previous month, falling short of market forecasts. It was also the eight-straight month of consumer inflation.

India continues to demonstrate remarkable resilience, with private sector activity remaining robust in October. India’s composite PMI edged up to 58.6, from 58.3 in the September, a flash estimate showed. This was driven by expansions in both factory production and services activity. Total new orders expanded at a faster pace, driven by an improvement in international demand for Indian goods and services.

Latin America continues to present a nuanced economic picture, with inflation, previously exhibiting continued signs of cooling, resurging, limiting the scope for further monetary easing. Specifically, the Central Bank of Brazil raised its Selic rate by 25 bps to 10.75% in its September 2024 meeting, as expected. The move aligned with the goal of converging inflation toward the target level while smoothing economic fluctuations. Meanwhile, the Central Bank of Chile unanimously voted to reduce the policy interest rate by 25bps to 5.25% at its October meeting. This decision comes amid global shifts, including the Fed’s rate-cutting cycle and China’s economic stimulus measures.

Fund performance

In October, the CC Emerging Market Bond Fund realized a loss of 1.32%. Throughout the month, the Manager – aiming to increase the portfolio’s duration in a gradual manner and locking in coupons prior to continued easing – continued to take advantage of selective opportunities. Credit issues which the CC Emerging Market Bond Fund added its exposure to include the 6.15% Teva Pharm 2036 and the 7.75% Ecopetrol SA 2032. The latter, replacing a lower coupon bond issued by the same corporate.

Market and investment outlook

Looking ahead, the evolving global interest rate environment, particularly decisions by the Fed, will remain crucial to monitor. Indeed, a continued dovish stance will prove beneficial, potentially translating into a weaker US dollar against domestic emerging currencies. On the contrary, a hawkish Fed stance (a scenario whereby it is seemingly fading) may lead to a sustained period of higher rates globally. A “higher-for-longer” dollar scenario indeed presents a challenge for EM economies, notably; reduced fund flows from foreign investors seeking higher returns elsewhere, and increased refinancing costs for companies with large foreign currency debt burdens.

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 while increasing the portfolio’s overall duration. This, whilst keeping a close eye on the political landscape within Emerging Markets and possible escalation of geopolitical tensions, which to-date have alas endured. With rate cut expectations now increasing over the year, optimism remains.