Euro High Income Bond Fund Accumulator

The CC Euro High Income Bond Fund Accumulator aims to maximise the total level of return for investors through investment in a diversified portfolio of Bonds. To achieve this objective, the Investment Manager invests primarily in a diversified portfolio of over 65 intermediate term, corporate & government bonds with maturities of 10 years and less.

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

• The fund may not invest more than 10% of its assets in the same company
• The fund may not keep more than 10% of its assets on deposit with any one credit institution. This limit may be increased to 30% in respect of deposits with an Approved Institution
• The fund may not invest more than 20% of its assets in any other other fund
• The fund may not carry out uncovered sales (naked short-selling) of securities or other financial instruments

October 2021

Consequent to an increased level of money supply through unprecedented monetary stimulus, an uptick in inflation was theoretically warranted. Thus far, current inflation levels proved to be supply rather than consumer driven, and to this extent this tends to trigger more uncertainty on the next moves monetary politicians should take. Whether such price increases are transitory or else persistent, however, is yet an outcome ought to be determined.

The sustainability of inflationary pressures has in October continued to be quite a debate. Largely, investors are of the view that temporary price pressures could well be embedded in more long-term expectations and last even as the growth from reopening fades away. A surge in energy prices, due to an increase in both demand and limited capacity, have made matters worse, amplifying fears around longer-lasting inflationary pressures.

Theoretically, sustainability in price increases is maintained through a continuous rise in demand, and not through overall price rises resultant to a higher cost of production. Supply bottlenecks – in our view the key source to inflationary pressures, is a phenomenon we’ve been witnessing in 2021. Disruptions worsened by a second coronavirus wave, a blockage in the Suez Canal earlier in March, port closures in China, and capacity limitations, are seemingly persisting. Supply issues along with increased demand for goods, led to higher input costs, which were ultimately translated onto customers.

In the month, inflationary pressures have led markets to price in a faster pace of policy tightening from central banks across the world. Notably, the U.S. 10-year benchmark Treasury yield hit a high of 1.7 per cent over the month of October. Larger increases in shorter-dated yields caused interest rate curves to flatten.

From an economic viewpoint, the path towards a full recovery has all-in-all 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. Economic data is now showing stronger signs. Albeit earlier witnessing a slight deceleration in the pace of expansion, data points are seemingly maintaining the recent pace. Leading economic indicators continue to revolve in expansionary territory while inflation data remains on an upward trajectory.

Business activity in the Euro economic area, previously witnessing a strong recovery momentum and reaching its peak in July, continued to moderate, as October’s Composite PMI data – a useful gauge of economic health in the two key sectors, appears to have just past the peak rate of growth. Supply issues are said to have been a major headwind to businesses.

In October, Eurozone Composite PMI was revised slightly lower to 54.2 from a preliminary estimate of 54.3 and lower than the previous month’s reading of 56.2. Although revolving in expansionary territory, October’s reading maintained its recent downward trend, pointing to the slowest growth in private sector activity in six months.

A slowdown in economic activity was evident in Europe’s largest economy, Germany. Albeit still reporting strong PMI data, revolving in expansionary territory, activity in both manufacturing and services saw declines. In September, manufacturing PMI was revised slightly lower to 57.8 from a preliminary of 58.2, pointing to the slowest growth in factory activity in 9 months amid continued supply disruptions. Services PMI stood at 52.4, down from September’s 56.2. October’s reading pointed to the slowest growth in the services sector in 6 months, as the pace of economic recovery lost further momentum. Business confidence in the services segment remained strong and even showed a slight improvement, aiding job creation.

Eurozone inflation was estimated at 4.1 per cent in October 2021, higher than September’s actual 3.4 per cent and above economist expectations of 3.7 per cent. October’s flash reading is the highest since July 2008, further raising concerns about the ECB’s narrative that recent price spikes are seen as temporary and that the economy requires low borrowing costs. Month-on-month, inflation increased by 0.8 per cent – the highest monthly rate since March 2021, preliminary estimates showed.

European sovereign yields have in October pointed higher, continuing to reverse some of the downward moves envisaged since the end of Q2 2021, as economic activity maintained its recent robust pace and European Central Bank (ECB) President Christine Lagarde failed to push back against hawkish market bets that were pricing in two rate hikes by the end of 2022. During the month, the single currency bloc continued to benefit from the release of pent-up demand, having come out of coronavirus-inflicted restrictions relatively late. Notably, yield of the 10-year German Bund, closed the month 9bps higher at -0.11 per cent from -0.2 per cent at the end of September. Bond yields of sovereigns within the bloc’s periphery – those which offer a premium over Germany’s negative yielding debt, rose at somewhat similar, yet higher pace. Italy’s and Spain’s 10-year sovereign yields rose 31bps and 15bps, respectively, over the month.

The governing council of the ECB held off making any significant moves in its policy meeting. The central bank left its key interest rate unchanged. In support of its two per cent inflation target and in line with its monetary policy strategy, the Governing Council expects interest rates to remain at their present or lower levels. Also, net asset purchases under the Pandemic Emergency Purchase Programme (PEPP) shall continue with a monthly pace of €20 billion for as long as necessary to reinforce the accommodative impact of its policy rates. Asset purchases shall come to an end shortly before the bank starts raising its key ECB interest rates.

The CC Euro High Income Bond Fund dropped by 0.74 per cent in October, in line with the widening in spreads within European high yield Throughout the month the Manager continued to seek pockets of value by looking into attractive credit stories. Notably, exposure to the gaming industry, now comprising of 6.10 per cent of the portfolio, was increased through Sazka group – the largest pan-European lottery operator with leading market positions in Austria, the Czech Republic, Greece and Cyprus.

Going forward the Managers believe that credit markets will continue to be aided by the support of primarily monetary politicians, creating a positive technical environment. In terms of bond picking, the Managers will continue to monitor the current environment and take opportunities in attractive credit stories which should continue to add value to the portfolio.