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

September 2021

Policy action by the respective central bankers, sustainability in economic momentum, and inflation proposition – stemming from a reopening of economies, supply chain disruptions, and a commodity super-cycle, were undoubtedly the key themes in Q3 2021.

The role of central bankers and governments, have since the coronavirus pandemic broke, been crucial. In response to the ensuing economic disruptions, policy makers intervened, introducing from a monetary policy perspective; interest rate cuts and bond purchasing programmes. Governments, albeit generally constrained in terms of fiscal space, swiftly reacted, introducing fiscal stimulus. Monetary intervention allowed corporates to tap the primary market at low favourable rates while fiscal intervention allowed corporates to maintain their cash buffers and ultimately survive. The latter at the expense of increased debt levels. Notably, Brazil’s ‘Debt-to-GDP’ rose to 88.83 per cent in 2020, from 64.26 per cent in the previous year. Fitch forecasts debt to fall to 81.50 per cent in 2021.

From an economic viewpoint, the path towards a full recovery, proved bumpier than previously anticipated. A vaccination drive taking long to pick-up speed along with a more severe wave of infections, lessened the pace of the recovery, giving rise to doubts about the sustainability of economic growth. While a slight deceleration in the pace of expansion is to be expected as economies normalise after the pandemic, the extent of such normalisation and sustainability in economic momentum remains in question.

The relaxation of coronavirus-inflicted movement restrictions, ensuing increased demand for goods, possibly also a result of a change in consumer trends, led to supply chain disruptions and labour shortages. A phenomenon we’ve been witnessing in 2021. Disruptions along with increased demand for goods, led to higher input costs, which were ultimately translated onto customers. This giving rise to the inflation proposition. Consequent to the said rise in inflation, particularly profound in Emerging countries, the respective central banks are swiftly reacting. In response to rising inflation, in September The Central Bank of Russia continued with its policy tightening programme, raising its benchmark rate by another 25 bps to 6.75 percent. The Central Bank Brazil, took on a similar path, unanimously deciding to raise the Selic Rate by a further 100bps in its last meeting. Brazil’s rate hike was the fifth interest rate hike in 2021.

From the data front in the emerging market world, China witnessed a rise in the manufacturing sector, following a August’s drop – the result of containment measures to curb rising cases of the Delta strain, supply bottlenecks, and high raw materials. China’s Manufacturing PMI rose to 50.0 in August 2021 from 49.2 in the previous month, and above market estimates of 49.5. New orders rose for the first time in three months and buying levels returned to growth while output fell at a softer rate. From the employment front, jobs growth dropped for the second straight month and at a steeper pace. In regards to pricing, inflationary pressures surged with input prices rising the most in four months – the 16th straight month of increase, amid reports of higher energy and raw material costs. This in turn led to a steady increase in prices charged to consumers.

Output shrank for the first time in 17 months while new orders dropped for the second successive month. Export sales contracted for the first time since February. Services, following a strong pick-up in July, dropped to 46.7. August’s reading was the first contraction in services activity since April 2020. New orders shrank for the first time in 16 months, while employment fell for the second time in three months on the back of rising outstanding business. Meanwhile, new export business remained broadly in-line for the second month running. Input prices rose modestly due to higher staffing costs and increased transportation fees, while output prices fell following a solid increase in July. Following a substantial dip in the previous month, Services returned to an expansionary territory following a modest rise. China Services PMI jumped to 53.4 in September 2021 from 46.7 in the prior month, amid a bounce in new orders as a major coronavirus outbreak in the eastern province of Jiangsu eased. Albeit at a slower pace, outstanding business continued to increase.

Over to Brazil, business activity in Latin America’s largest economy marginally rose to 54.7 in September 2021 from 54.6 in the previous month, pointing to a fourth straight month of expansion in the country’s private sector. Growth was mainly supported by both manufacturing and services activity. Both new orders and employment continued to increase. On the pricing front, both input costs and output charges increased at unprecedented rates. Overall sentiment remained positive, the most optimistic regarding the 12-month outlook for business activity.

Annual inflation rate in Brazil increased to 10.25 per cent in September from 9.68 per cent in August of 2021. The reading proved the highest since February 2016 as the reopening of the economy, global supply issues, effects of a weaker currency, and a severe drought continued to weigh on prices. Month-on-month, consumer prices increased by 1.16 per cent.

In September, Emerging Market high yield witnessed a loss of 2.09 per cent, underperforming both the European and US counterparts. Regulatory actions in China – an important player in EM corporate credit, were the initial trigger for market weakness. Market jitters were then amplified by the re-imposition of some coronavirus-inflicted restrictions leading to global supply chain disruptions, worries about possible systemic financial system risks stemming from the potential collapse of Evergrande – the country’s second-largest real estate developer by sales, and an intense energy shortage in the country.

In the month of September, the CC Emerging Market Bond Fund declined by 1.60 per cent. The fund continues to outperform strongly its internal comparable benchmark on the back of an underweight position in sovereign names and a strong recovery in names which were directly hit by the pandemic and hindered the performance in 2020.

Throughout the month the Manager continued to seek pockets of value by looking into attractive credit stories, particularly in the energy and banking sectors. Namely the manager increased its position in PEMEX – the Mexican state-owned petroleum company managed and operated by the Mexican government, on the basis of increased energy prices, and HSBC due to the Asia exposure within the bank’s operations. 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.