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

September 2024

Introduction

Malta’s economy continued to demonstrate resilience and growth, with second-quarter growth of 4.40% year-over-year. The reading marked the fourteenth consecutive quarter of expansion, albeit at the weakest pace since the third-quarter of 2022 amid a slowdown in consumer spending and government expenditure.

Foreign trade, particularly exports, remains a key driver of the economy. The strength of Malta’s export sector is evident in the robust 6.40% year-over-year growth recorded in the second quarter. Additionally, business confidence remained strong, despite lower compared to June’s reading. Tourism, a cornerstone of Malta’s economy, continues to thrive with traffic volumes at the Malta International Airport proving to be well above the record passenger movements handled in 2023. 

Market environment and performance

Europe’s economy, initially proving somewhat resilient, has in recent months consistently shown signs of weakening, particularly as its largest economies continue to face a deterioration in economic metrics. Recent Purchasing Managers’ Index (PMI) data supports these trends, indicating a slowdown in the Eurozone and a potential technical recession in Germany, Europe’s largest economy.

September’s Eurozone Composite PMI, albeit revised higher, signaled total business activity in Euro Area private sector activity decreased for the first time since February, as the three biggest economies in the Euro Area – Germany, France and Italy – recorded contractions simultaneously for the first time in 2024 so far. Overall, services slowed (51.4 vs 52.9 in August) and the manufacturing contraction deepened (45 vs 45.8 in August) as demand for euro area goods and services fell at the quickest pace in eight months. This, leading to backlog reductions and a slightly faster rate of job cutting. Business confidence too weakened, yet fractionally, taking it further beneath its long-run average.

Inflation, consequent to the base effect, particularly on energy, fell to 1.8% in September, the lowest since April 2021, compared to 2.2% in August and preliminary estimates of 1.9%. Core inflation, albeit marginally, eased to 2.7%. A particular concern for the ECB is services inflation, which remains anchored at or above 4.0% for a fifth consecutive month. The labour market remained healthy, with unemployment rate revolving at notable lows (6.4% in August), and significantly below a 20-year average of 9.3%.

Consequent to the worsening economic trends, the European Central Bank (ECB) eased monetary policy by cutting interest rates by 25 bps in September, driving yields overall lower (meaning prices rose). German and French 10-year government bond yields declined over the quarter but underperformed relative to Italy and Spain, which were among the strongest performers in Europe.

Fund performance

The CC Malta Government Bond Fund marginally underperformed in September, noting a gain of 1.25%. Throughout the month, the Manager reduced its exposure to shorter dated sovereigns, to make way for longer-dated Maltese sovereign bonds. This, in line with the Managers investment strategy to increase the overall portfolio duration.

Market and investment outlook

The narrative for credit markets remained largely unchanged throughout the third quarter, with investor focus centered on economic data and central bank policy. In the most recent policy meeting, central bankers demonstrated their willingness to adopt an accommodative bias, depending on economic needs, with a willingness to adjust policy accordingly to foster a healthy economic environment. The ECB continued to emphasize on data dependency, eyeing inflation, particularly within the services sector. Safeguarding the employment market too remains key.

The anticipation of year-end interest rate cuts fosters a positive outlook for the global bond market. We believe locking in current attractive coupon levels is prudent before potential policy easing.