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 Fund is classified under Article 6 of the SFDR meaning that the investments underlying this financial product do not take into account the EU criteria for environmentally sustainable economic activities.

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 2023

Introduction

Emerging Markets, following a flat third quarter, closed the month in the red. Fears that strong US economic growth will keep interest rates high for an extended period dampened risk sentiment. This was exacerbated by continued economic frailty in China and the lack of a convincing response from the government, and renewed geopolitical tensions in the Middle East. The latter driving energy prices higher amid the risk of further tightening to global oil supplies.

China’s performance disappointed as indicators continued to point to a sluggish economic recovery and as troubles in the debt-laden property sector continued to brew. Although policy stimulus introduced to tackle these challenges were limited, the macroeconomic data released; notably third quarter GDP, industrial production, and retail sales figures, surprised to the upside.  Brazil was another laggard even as economic data continued to improve and despite expectations of further policy easing.

From a performance standpoint, Emerging Market corporate credit traded lower (a loss of c. 1.14%) yet outperformed its rated developed market peers. This was largely due to the lower duration of the high yield segment, with much of the price movement over the month coming from core rates selling off.

Market environment and performance

In China, various important economic indicators have in recent months shown marginal improvement, and the macroeconomy has shown signs of stabilization. However, the economic recovery has yet to find a solid footing, with insufficient domestic demand, external uncertainties, and pressure on the job market yet noted. 

Leading economic indicators, notably Purchasing Managers Index (PMI), albeit softening remained in expansionary territory as a pick-up in the services segment offset a contraction in the manufacturing sector amid a renewed fall in output as the economic recovery remained fragile. The Caixin China General Service PMI (50.4 v 50.2 in September) rose marginally as Beijing continued its efforts to stabilize the economy. Meanwhile, Caixin Manufacturing PMI (reading 49.5 v 50.6 in September) first contraction in the manufacturing sector since July amid a renewed fall in output as the economic recovery remained fragile. Overall, the market conditions for manufacturing were more sluggish compared with the services sector.

Contrasting China’s economy (yet to find a stable footing), business activity in India – the fastest-growing major economy in the world – continued to show a robust demand for Indian-made products and services. In October, S&P Global India manufacturing PMI (reading 55.5 v 57.5 in September) pointed to the 28th straight month of growth in factory activity. Expansions was however at the softest pace since February, as output rose the least in 8 months, new order growth hit its lowest level in a year, and foreign sales expanded at the softest pace in 4 months. The S&P Global India Services PMI (reading 58.4 v 61.0 in September) too remained in expansionary territory, yet below market forecasts amid subdued demand and price pressures.

Price pressures in EM markets have generally continued to show signs of easing, paving the way for a continued easing in policy tightening. In Mexico, annual inflation rate fell for a ninth-straight month to 4.26%, from 4.45% in September. Core inflation too eased to 5.50%. Notwithstanding the successive declines, inflation still remains above the central bank’s 2-4% target range. Chile, among the first to cut rates, too saw inflationary pressures ease.  Meanwhile, China – yet to find a stable footing as lacklustre demand continues to weigh on the economy – saw consumer prices fall, compared with a flat reading in the prior month.

Fund performance

In the month of October, the CC Emerging Market Bond Fund realized a loss of -1.42%, in line with moves observed within the emerging market space. Throughout the month, the Manager sought to reduce its cash exposure while increasing the portfolio’s exposure to sovereign bonds, while increasing the portfolio’s duration.

Market and investment outlook

The positive momentum from the previous months came to a halt in Q3, and persisted through October, as sentiment surrounding Emerging Markets worsened, in the absence on a sign of concrete recovery and government support in China.

Indeed, the recovery in China – an important driver also to global economic growth – remains unclear with expectations of stronger policy support to revitalise growth, still expected by many. The effectiveness of the measures implemented so far is yet to be determined. In recent months, the Chinese government reiterated its commitment to bolstering the economy. New initiatives were targeted to address challenges in the real estate sector and to boost consumer spending.

In Latin America, after raising interest rates aggressively during the post-coronavirus rebound, the trade-off between controlling inflation and supporting growth is now decisively tipping towards easing. Central Bank of Chile’s decision, in its July meeting, to cut rates marked the start of a broad easing trend within emerging markets. Brazil followed, cutting its key Selic rate to-date by 150bps to 12.25%. India, Mexico, and Colombia are now expected to jump on the rate-cutting band wagon, particularly as inflationary pressures continue to edge lower. Indeed, such moves shall likely support emerging markets, fueling gains and brightening the outlook for growth-sensitive assets.