Emerging Market Bond Fund USD 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

June 2021

The phrase “a lot may happen in a year” seems fitting for both financial markets and economic data. Financial markets, then recovering from significant declines, have improved. Equity markets headed to all-time highs while credit markets, previously witnessing credit spreads reaching significant highs of over 1000bps, recouped. Economic data, dampened as coronavirus-inflicted restrictions weighed, improved.

Economic data, in line with expectations maintained its recent pace, proving strong. The vaccination rollout in many developed countries, being well underway, allowing for the unlocking of economies and a gradual return to normality, combined with sizeable fiscal support is facilitating a big bounce in economic activity. A scenario everyone has longed for. The pick-up in economic activity has however, been partly overshadowed by a sharp pickup in inflation and a rising concern that this could lead to central banks withdrawing some of their stimulatory policies.

Commodities continued to show persistent strength across the asset class, with natural gas and molybdenum being among the top-performing assets.  Crude oil, conditioned by the OPEC+ decisions in regards to the level of output, also witnessed notable gains for the month.

Real world data on vaccine efficacy continues to be largely positive, with hospitalisations remaining largely low in those countries where the vaccine rollout has progressed far enough to protect the most vulnerable age groups. The large divide between developed and emerging economies is now evermore apparent, as many European countries plan their summer re-opening, while the tragic health crisis in India continues, and underlining the need for a rapid rollout of vaccines on a global scale. Progress is being made, with over 350 million vaccines so far administered in India.  This progress, combined with a relatively young population, brings hope that the worst of the Indian health crisis could be over within months. The quicker a higher proportion of the world population is vaccinated, the quicker the return to normality, and thus revival of India’s economic climate.

From the data front in the emerging market world, China – the world’s second largest economy, albeit remaining in expansionary territory witnessed a decline in both manufacturing and services sector. China’s factory activity growth slowed amid the recent uptick in local coronavirus cases and supply chain difficulties. China’s Manufacturing PMI fell to 51.3 in June 2021 from 52 in the previous month, and below market estimates of 51.8. Output rose the least since March 2020, new order growth eased to a three-month low, and export sales were broadly stagnated. The degree of optimism remained unchanged from May’s four-month low. Similarly, China’s Services PMI dropped to 50.3 in June 2021, from 55.1 in the previous month, amid an outbreak of a more infectious Delta variant in Guangdong and the consequent imposition of anti-virus measures. Albeit the degree of positive sentiment dropped to a nine-month low as concerns over the epidemic situation heightened, sentiment remained strongly upbeat.

Over to Brazil, factory activity in Latin America’s largest economy rose to 56.4 in June 2021 from 53.7 in the previous month. The reading pointed to another acceleration in factory activity and the fastest pace since February 2021, driven by a solid increase in new orders and output. Moreover, the overall level of positive sentiment hit a six-month high in June, supported by hopes of greater vaccine availability and that the pandemic will retreat. Meanwhile, Services PMI jumped to 53.9 from 48.3 in the previous month. The reading which pointed to the strongest level of expansion since the beginning of 2013 came in following the easing of public health restrictions and progress in the vaccination campaign.

In June, Emerging Market high yield (more speculative bonds as determined by a credit rating agency), generated marginal returns, underperforming both the European and US counterparts.

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. The extremely accommodative liquidity situation is helping to maintain stability, despite the deep wounds inflicted on already fragile economies. This highlights the importance of the managers’ strategy of being selective.

In the month of June, the CC Emerging Market Bond Fund increased by 0.28%. Throughout the month the Manager continued to seek pockets of value by looking into attractive credit stories in the financials, basic materials, energy, and utilities sectors.

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