Emerging Market Bond Fund Euro Accumulator

The objective of the Sub-Fund is to endeavour to maximise the total level of return for investors through investment primarily, in a well-diversified portfolio of debt securities and other fixed-income or interest bearing securities.

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 2021

Consequent to the unprecedented coronavirus pandemic which infected over a 100 million people and led to 2.2 million deaths worldwide, 2020 was a year of extraordinary challenges. Despite the efforts made by governments and central banks to mitigate the impact on the economy, through substantial monetary and fiscal stimulus packages, the global economy (as estimated by the International Monetary Fund) contracted by 3.5 per cent.

Corporate credit, hindered at the peak of the pandemic following growing concerns about their ability to service debt, recovered. Credit spreads previously witnessing substantial widening (reaching significant highs of over 1000bps), tightened, with both investment grade and high yield issuers delivering strong positive total returns. U.S. investment grade and EM high yield outperformed its European counterparts.

Contrasting the more developed economies, emerging market economies started 2021 generally on a less positive note. Coronavirus related concerns, notably; the renewed coronavirus outbreaks and logistical issues surrounding coronavirus vaccinations, weighed on investors.

From the data front in the emerging market world, China – the world’s second largest economy and one of the few to register growth for 2020, witnessed softness in its data. In January, while remaining within expansionary territory, China reported a drop for both manufacturing and services sector.

In January, China’s manufacturing PMI fell to a seven-month low of 51.5 from 53.0 in December, and lower than market expectations of 52.7. Both output and new orders rose at softer paces, while export sales shrank for the first time in six months due to a resurgence in coronavirus infections globally and ensuing movement restrictions. After broadly stabilizing in December, employment within the manufacturing sector fell. Also, manufacturers recorded the slowest accumulation in backlogs of work for eight months. Meanwhile, services PMI dropped to a nine-month low of 52.0 from 56.3 in the December 2020.

From the Latin American region, published economic data dampened Brazil’s positive run. Notably, business confidence in Brazil declined to 60.9 points in January 2021 – the lowest since August 2020 as expectations over the next six months regarding the country’s economic situation deteriorated. The recent surge in coronavirus infections, particularly in the Amazonas state which pushed hospitals in the capital Manaus to their limits, the country’s struggle with its vaccine rollout, and political tensions surrounding the need for further social spending to help struggling Brazilians is indeed worrisome.  

Meanwhile, Brazil reported a lower manufacturing PMI for the month of January, at 56.5 when compared to December’s, standing at 61.5. The first reading of 2021 pointed to the smallest expansion since June 2020. Production and new orders continued to rise solidly although at weaker rates, while export orders broadly stagnated. Employment softened to the weakest in the current seven-month sequence of expansion as corporates became increasingly cautious about their expenditures.

From a technical perspective, emerging market debt is expected to keep pace with high yield credit in developed markets, as higher yielding debt remains an attractive avenue for those investors in search of a higher yield.

In the month of January, the CC Emerging Market Bond Fund fell by -0.37 per cent, beating the benchmark by 28bps. Throughout the month the Manager continued to seek pockets of value by looking into attractive credit stories, primarily within metals and mining, energy, and financial sectors – the latter of which is domiciled in India, an economy which may present further opportunities in the near future given its macroeconomic dynamics.

Going forward, the Manager will continue to assess the EM space scenario even on the basis of further monetary policy actions taken by Central Banks, which seem to follow the Fed’s accommodative stance.