Emerging Market Bond Fund Euro Accumulator

The Fund aims to maximise the total level of return through investment, in a diversified portfolio of Emerging Market (“EM”) Corporate and Government fixed income securities as well as up to 15% of the Net Assets of the Sub-Fund in EM equities. In pursuing this objective, the Investment Manager shall invest primarily in a diversified portfolio of EM 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-EM 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

December 2022

Introduction

2022, a year – possibly like no other in recent market history – was characterised by economic uncertainty and significant market volatility.

Geopolitical tensions in eastern Europe and central banks’ battle against inflationary pressures, took centre stage, proving to be the main sources of market struggles. Indeed, bond markets felt the pinch, ending the year substantially negative, notwithstanding some relief witnessed in the final quarter of the year as market participants clinched to the idea that inflation may have possibly peaked, paving the way for the pace of interest rate rises to slow. In China, relief towards the debt-ridden property market accelerated. Simultaneously, strict coronavirus restrictions – a major dampener on domestic demand – were eased, re-igniting hopes that the country is incrementally heading towards the end of its zero-Covid policy. Such news was positively digested, alleviating market sentiment, notably within the EM region.

In the fourth and final quarter of 2022, emerging market credit registered a strong rebound, outperforming developed market counterparts.

Market environment and performance

From the data front in the emerging market world, leading indicators, particularly PMI data continued to show signs of weakness. In China, the composite PMI reading, pointed to the fourth straight month of contraction in private sector activity, amid a spike in coronavirus infections after Beijing abruptly decided to exit strict pandemic curbs. Manufacturing fell to 49.0 in December, the lowest since September as a spike in Covid cases disrupted output, led to a decline in new orders, while export sales fell further. Services noted a softer decline (48.0 v November’s 46.7) in the sector, after removing its stringent zero-Covid policy.

In Brazil, private sector business activity fell to 49.1 in December from 49.8 in the previous month, Brazil’s private sector second successive contraction. Notably, services fell to 51.0 from 51.6 in November, pointing to the slowest pace of growth in more than a year, pressured by heightened political uncertainty. Meanwhile, manufacturing was down for the seventh consecutive month to 44.2 in December, largely unchanged from the previous month reading of 44.3. The latest reading pointed to a third contraction in factory activity as new orders dropped to one of the most significant degrees on record, mainly due to subdued demand from Europe, Latin America, and the US. Simultaneously, employment fell significantly and at the fastest pace in two-and-a-half years.

Price pressures in EM markets have generally continued to show signs of easing. In Brazil, annual inflation for a 5th successive time eased to 5.90% in November from 6.47% in the previous month, the lowest reading since February 2021 as prices of transport and housing eased. Also, in Mexico and India, inflation eased to 7.80% and 5.88%, respectively.

In December EM corporate credit rose c. 2.66%., recouping some of the losses observed on a year-to-date basis and outperforming both European and US corporate credit at both investment grade and high yield levels. For the full year 2022, the EM corporate credit closed substantially in the red, a total return of c. -14.82%.

Fund performance

In the month of December, the CC Emerging Market Bond Fund realized a noteworthy gain of 2.43%, in line with the continued spread tightening within the EM space. Throughout the month the Manager continued to seek pockets of value, looking at attractive opportunities which may well yield capital appreciation.

For the full year, the fund saw a return of -13.21%, outperforming its benchmark returning -15.28%.                               

Market and investment outlook

Consequent to political uncertainty in important EM regions, Russia-Ukraine geopolitical tensions, and uncertainty in China surrounding both the coronavirus pandemic and property crisis, EM corporate credit underperformed its developed market counterparts for the full year 2022. In the new year, the scenario may however differ. Recent optimism, a result of the moves taken by Xi Jinping’s regime to alleviate the economy through easing of strict coronavirus restrictions imposed and others targeted towards the debt-ridden real-estate sector, shall certainly prove benevolent. Monetary policy decisions – which typically follow the Fed’s course of action and now seemingly employing a less aggressive stance – may too prove accommodating.

In terms of bond picking, the Manager will continue to monitor the market environment and take opportunities in attractive credit stories which should continue to add value to the portfolio. The widening observed in corporate credit spreads over the calendar year have indeed posed opportunities, presenting attractive entry points to yield capital appreciation.