Emerging Market Bond Fund Euro Distributor

The Fund aims to maximise the total level of return through investment, in a diversified portfolio of Emerging Market Corporate and Government fixed income securities as well as up to 15% of the Net Assets of the Fund in Emerging Market equities.

In pursuing this objective, the Investment Manager shall invest primarily in a diversified portfolio of Emerging Market 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-Emerging Market 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

• Emerging Market Issuers as per MSCI Emerging and Frontier
• Average Credit Quality of B- (or equivalent)
• Minimum Credit Rating CCC+ (or equivalent)
• Up to 30% in Non Emerging Market Issuers
• Up to 15% in Emerging Market Equities
• Up to 10% in Non-Rated Bonds

February 2024

Introduction

Following a period of underperformance, emerging markets begun to exhibit signs of recovery, as evidenced by positive performance in the final months of 2023 that has extended into the new year. February sustained such positive progress, amid a mixed and challenged performance observed across credit markets at large.

From an economic perspective, Emerging markets exhibited a disparity in performance. India, for instance showcased positive growth indicators, potentially reflecting ongoing structural reforms and a resilient domestic demand.  However, others, such as Brazil, remained mired in inflation and currency depreciation. This unevenness underscores the inherent diversity within the EM classification, where individual economies grapple with unique challenges and opportunities.

From a performance standpoint, emerging market corporate credit posted gains (c. 0.98%), outperforming its developed market counterparts.

Market environment and performance

China’s macro economy exhibited tentative signs of recovery in February. The Consumer Price Index (CPI) rose by 0.7% year-on-year, indicating a potential uptick in domestic demand, which aligns with a consistent trend observed since December 2023. This positive development is further bolstered by growth in import figures for the first two months of the year. However, a comprehensive assessment of the first quarter’s performance awaits further data. While some analysts project a possibility of exceeding growth expectations based on February’s indicators, significant headwinds remain. The property sector’s decline continues unabated, and debt accumulation presents a persistent risk factor. In conclusion, February appears to be a continuation of China’s uneven economic trajectory in 2023. Although nascent signs of improvement are present, structural challenges demand continued monitoring and strategic policy interventions.

As conferred, India’s economic performance exhibited continued expansion, albeit with tentative signs of moderation. The services sector, a crucial engine of the economy, remained robust, although growth slowed slightly compared to January. Meanwhile, manufacturing noted the fastest growth in the factory activity since last September, as sales rose owing to a remarkable expansion in new export orders. Albeit the composite reading suggesting a potential easing in the growth trajectory, global rating agency Moody’s revised India’s 2024 GDP forecast upwards to 6.8%, citing the robust performance of the previous quarter and a more favourable global economic outlook. This upward revision underscores the underlying strength of the Indian economy.

In Latin America, Brazil’s Central Bank upped its 2024 GDP growth forecast again, to 1.8%, indicating a cautiously optimistic outlook. However, consumer confidence dipped, potentially dampening spending. While activity remained stable – yet revolving in expansionary territory -, February highlighted the need to address consumer sentiment for Brazil’s economic recovery to gain stronger momentum. Mexico, too exhibited signs of economic progress, with despite a challenging global environment characterized by tightening financial conditions and heightened uncertainty. The OECD’s Economic Survey for Mexico highlighted this strength, notably Mexico’s robust fiscal management. For 2024, President López Obrador forecasted a 3.5% economic growth, suggesting optimism about the country’s economic trajectory.

Fund performance

In February, the CC Emerging Market Bond Fund realized a gain of 0.22%, supporting the fund’s outperformance against its benchmark. Throughout the month, the Manager largely maintained its portfolio allocation, with the fund’s only move targeted to increase the portfolio’s duration through an ETF. Indeed, the decisions previously taken to increase the fund’s exposure to sovereigns and quasi-sovereigns, notably to Brazil and Mexico amongst other, have continued to pay dividends.

Market and investment outlook

The recent rally in emerging markets sustained in February amid ongoing optimism about the Federal Reserve (Fed) potentially cutting interest rates in the middle of the year and a rebound in China, which was underpinned by better-than-expected activity data and a cut to one of its key mortgage policy rates. Within the EM space, high-yield debt outperformed their higher rated peers as investors continued to seek higher returns amidst rising interest rates.

While February presented some positive developments in Emerging Markets, rising interest rates, currency fluctuations, and China’s yet indefinite recovery pose ongoing challenges. Asia’s economic powerhouse economic recovery, while showing benevolent signs, requires further consolidation. China’s economic agenda for 2024, unveiled at a recent National People’s Congress, prioritizes balanced growth within a global environment of uncertainty. Key objectives include maintaining a stable GDP growth rate of around 5%, fostering economic security by creating over 12 million new urban jobs, controlling inflation through a 3% consumer inflation target, and keeping unemployment low at approximately 5.5%.

With respect to the Emerging Market Bond Fund, the manager will continue to assess the market landscape and capitalize on appealing credit opportunities. Consistent with recent actions, the manager will continue to tailor the portfolio to match prevailing yield conditions while increasing the portfolio’s overall duration. Optimism for the year ahead remains on the back of continued rate cut expectations.