Emerging Market Bond Fund USD Distributor

The Sub-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

August 2023

Introduction

Emerging market (EM) corporate credit headed lower in August, underperforming developed markets as fears surrounding China’s slowing economic growth momentum and trouble yet brewing within the debt-laden property sector, weighed on investor sentiment.

The end of the month saw authorities announce further stimulus measures to bolster the economy, targeted to boost consumer spending and address challenges in the real estate sector. These included a reduction in interest rates, a lowering of down-payment ratios, and a trimming of home mortgage rates.

From a performance standpoint, Emerging Market corporate credit traded lower, recording a loss of c. 0.83%.

Market environment and performance

On the data front within the emerging market sphere, leading economic indicators – largely expected to portray a solid and sustained recovery following an economic reopening in China – continued to fall short of expectations. The Caixin China General Service PMI (51.8 v 51.9 in July) slipped as it missed market forecasts. New order growth slowed while export sales fell for the first time since last December. Meanwhile, Caixin Manufacturing PMI (reading 51.0 v 49.2 in July, and market estimates of 49.3) marked the strongest pace of expansion in factory activity since February amid multiple efforts from Beijing to revive a weakening post-pandemic recovery.

Contrasting China’s continued slowdown, 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 August, S&P Global India manufacturing PMI (reading 58.6 v July’s 57.7) pointed to the 26th straight month of growth in factory activity, as new export orders rose sharply again. From the employment front, the solid pace of job creation, observed in the previous months, maintained. Services too aligned closely with market forecasts, boosted by rises in new orders, mainly in international sales. The S&P Global India Services PMI remained in expansionary territory at 60.1, lower than July’s 62.3.

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 seven-straight month to 4.64% in August, from 4.79% in the previous month. Core inflation too eased to 6.08%. Notwithstanding the successive declines, inflation remains still 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 rise, following a negative reading in the previous month.

Fund performance

In the month of August, the CC Emerging Market Bond Fund realized a loss of -1.66%, 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. This, namely through the republic of Brazil and republic of Poland.

Market and investment outlook

The positive momentum from the previous months came to a halt, as sentiment surrounding Emerging Markets worsened, in the absence of concrete support from 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 August, 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 lower rates by more than expected marked the start of a broad easing trend within emerging markets. Brazil followed suit, cutting its key Selic rate by 50bps to 13.25% after keeping borrowing costs on hold for eight consecutive sessions, while the market expected a 25bps cut.  Such move shall likely support emerging markets, fueling gains and brightening the outlook for growth-sensitive assets.