Malta Government Bond Fund

The Fund aims to maximise the total level of return for investors through investment, primarily, in debt securities and money market instruments issued by the Government of Malta. The Investment Manager may also invest directly or indirectly via eligible ETFs and/or eligible CISs) up to 15% of its assets in “Non-Maltese Assets” in debt securities and/or money market instruments issued or guaranteed by Governments of EU, EEA and OECD Member States other than Malta. The Investment Manager will not be targeting debt securities of any particular duration, coupon or credit rating.

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

December 2024

Introduction

In 2024, Malta’s economy continued its growth trajectory, driven by strong domestic demand and solid export performance. Tourism arrivals to Malta remained on the rise, while employment stayed robust, with unemployment falling to 3.1%.

Malta’s economy grew by 4.9% (annualized) in the third quarter of 2024, following an upwardly revised 8% increase in the previous quarter. This marked the slowest growth rate since the fourth quarter of 2022, influenced by a slowdown in household consumption. At the same time, imports grew at a faster pace than exports. However, both government spending and gross fixed capital formation showed stronger growth.

Inflation pressures on consumers also eased, with the annual inflation rate dropping to 1.8% in December from 2.1% in the previous month. This was the lowest inflation rate in nearly three years, as prices for food & non-alcoholic beverages, alcoholic beverages & tobacco, and transport all moderated.

Market environment and performance

The economic disparity between the US and the Eurozone remained. While Europe’s economy has consistently shown signs of weakening, particularly as its largest economies continue to face a deterioration in economic metrics, the US has maintained a steady economic trajectory. More recent Purchasing Managers’ Index (PMI) figures continued to support these trends, indicating a sustained slowdown in the Eurozone.

December’s Eurozone Composite PMI, albeit revised higher, pointed to a contraction in private business, as manufacturing (45.1 v 45.2 in November) deteriorated further while services (51.6 v 49.5 in November) pointed to a renewed upturn in output, though it remained moderate and below the survey average. Overall, new business continued to fall, extending a seven-month decline, with weak domestic and export demand. Employment too fell, at the sharpest rate in four years, driven by manufacturing job cuts. On the price front, pressures intensified, with input costs, particularly in services, rising at a fast rate, pushing overall inflation higher.

Inflation, previously noting a substantial decline due to base effects (particularly on energy), accelerated for a third straight month to 2.4% in December 2024, the highest rate since July, compared to 2.2% in November and in line with expectations. Core inflation remained steady at 2.7% while services inflation edged higher to 4.0% from 3.9% in the previous month.

The labour market, a beacon of hope for the Eurozone, remained healthy, with the unemployment rate revolving at notable lows (6.3% in November), and significantly below a 20-year average of 9.3%.

Fund performance

The CC Malta Government Bond Fund remained largely flat in December. For the full year, the fund reported a gain of 3.82%, compared to the internally benchmarked performance of 3.50%. Throughout the month, the Manager maintained the portfolio’s allocation after reducing cash exposure and increasing the portfolio’s exposure to longer-dated Maltese and European sovereigns in previous months.

Market and investment outlook

The narrative for credit markets remained largely unchanged at the end of the year, with investor focus centered on the political landscape, economic data, and central bank policy.

Central banks have recently adopted a more accommodative stance, tailoring their policies to specific economic needs. The European Central Bank (ECB) continues to emphasize data-driven decision-making. Grappling with a weakening euro and declining economic activity, the ECB remains focused on ensuring inflation returns to its 2% target and will adjust its policies based on incoming data, without committing to a fixed rate path.

Locally, we expect Malta’s economy to continue performing well. Recent data has been promising, with easing price pressures and tax cuts set to be implemented in 2025, which should support domestic consumer spending. Additionally, the strong influx of tourists in 2024 is a positive sign. Optimism within the tourism sector is expected to grow, benefiting the economy further if this upward trend continues.

In line with recent portfolio adjustments, we will modify the portfolio’s duration as necessary. Additionally, we aim to maintain the fund’s exposure to other European sovereigns, utilizing the permitted 15% maximum allocation.