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

August 2024

Introduction

Emerging market (EM) credit extended on the notable run witnessed since the start of the year. The asset class has since delivered positive returns across the board, driven by both price appreciation and income generation. Indeed, the carry in hard currency issues was a key driver, providing valuable protection against an overall rise in US Treasury yields.  Whilst acting as a buffer, the reliable income stream made EM debt an attractive proposition.

Such extended run was observed despite sharp declines at the start of the month on the back of disappointing US economic data and a surprise interest rate hike by the Bank of Japan triggered a flight to safety. However, as the month progressed, optimism about potential Federal Reserve interest rate cuts were helpful for EM returns, as was a weaker US dollar which provided a tailwind for the region.

In numbers, EM corporate credit returned c. 9.89% year-to-date, with income return contributing around 4.76%. August alone saw a total return of c. 1.58%.

Market environment and performance

China’s economy, despite intermittent signs of recovery, remains heavily conditioned by negative sentiment surrounding the real estate market. The government’s response has thus far proved insufficient, with a recent 10-basis point cut to the one-year loan prime rate falling short of expectations and failing to revive sentiment.

The country’s remaining growth engines too are faltering, underscoring the urgent need for more substantial government intervention to achieve the increasingly unlikely growth target. With GDP growth forecasts now below the People’s Bank of China’s 5.0% target, expectations for stimulus are rising. Indeed, there is an urgent need for China to enhance policy support and ensure the effective implementation of earlier policies

China’s General Composite PMI stood at 51.2 in August 2024, unchanged from July’s 9-month low. Still, it was the tenth straight month of growth in private sector activity, with faster manufacturing output growth offsetting slower services activity expansion. Likewise, for new orders, a renewed improvement in the manufacturing sector contrasted with a slower increase in services new business, though overall growth picked up pace. Meanwhile, employment levels fell despite rising backlogged orders. On prices, input cost inflation rose slightly, but increased competition resulted in selling prices falling the most since January. Charges declined across both manufacturing and service sectors. Looking ahead, confidence strengthened. In August, China’s annual inflation rate climbed to 0.6% from 0.5% in July, falling short of market forecasts of 0.7%. It was also the seventh straight month of consumer inflation.

India continues to demonstrate remarkable resilience, with economic activity remaining robust for a 37th consecutive month, August’s Composite PMI reading showed. Service providers signalled the strongest rise in business activity since March while goods producers posted the weakest expansion in production for seven months. New orders rose substantially, though at the slowest pace since May, as the service sector posted a quicker increase but manufacturing saw a slowdown.

Latin America continues to present a nuanced economic picture, with Inflation, previously exhibiting continued signs of cooling, resurging, somewhat limiting the scope for further monetary easing. Despite such challenges, upward growth revisions in Brazil, Chile, and Mexico, coupled with attractive investment opportunities and improved corporate performance, are fuelling optimism about the region’s long-term prospects.

Fund performance

In August, the CC Emerging Market Bond Fund realized a gain of 1.48%. Throughout the month, the Manager maintained its allocation, following strategic adjustments made in the prior period.

Market and investment outlook

Looking ahead, the evolving global interest rate environment, particularly decisions by the Fed, will be crucial to monitor. Indeed, a dovish stance will prove beneficial, potentially translating into a weaker US dollar. On the contrary, a hawkish Fed stance (now seemingly fading) may lead to a sustained period of higher rates globally. A “higher-for-longer” dollar scenario indeed presents a challenge for EM economies, notably; reduced fund flows from foreign investors seeking higher returns elsewhere, and increased refinancing costs for companies with large foreign currency debt burdens.

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. This, whilst keeping a close eye on the political landscape within Emerging Markets and possible escalation of geopolitical tensions, which to-date have alas endured. With rate cut expectations now increasing over the year, optimism remains.