Emerging Market Bond Fund Distributor Institutional - Euro

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 Sub-Fund in Emerging Marketequities. 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

• 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 2024

Introduction

Emerging market (EM) credit continued its notable run in Q2, extending the gains observed since the start of the year. The asset class delivered positive returns across the board, although sovereigns lagged corporate debt. This quarter’s performance was primarily driven by carry, with the elevated coupon income in hard currency issues playing a key role, providing valuable protection against rising US treasury yields. This reliable income stream offered a buffer for investors, making EM debt an attractive proposition.

Year-to-date, EM corporate credit has delivered a strong 6.09% return, with approximately 3.5% of that figure attributable to income return.

Positive economic updates further supported EM debt performance. China’s government measures to support the struggling housing sector boosted confidence, with private sector activity too remaining positive. Inflation, previously negative, have for four successive months proved positive, signalling a continued recovery in domestic demand. In India, optimism rose due to the expected re-election of Prime Minister Modi, although the possibility of a coalition government added some uncertainty. In Latin America, private sector activity remained robust, whilst inflation, albeit marginally increasing (recent figures showed) allowed central banks to maintain a more accommodative monetary policy stance.

Market environment and performance

China’s macroeconomy continued to exhibit signs of a recovery in June, with private sector activity still revolving in expansionary territory, despite China’s General Composite PMI slipping (52.8 v a previous month reading of 54.1). Still, June’s reading marked the eighth consecutive month of growth, as manufacturing output growth accelerated, while services saw a slowdown. New orders expanded at the softest pace in four months while employment shrank across manufacturing and service sectors. On the price front, consumer prices held steady at 0.3% in May for the second straight month while falling short of market forecasts of 0.4%. Despite nascent signs of improvement, structural challenges continue to persist. Recent government interventions, particularly in the property sector, offer hope, but their long-term effectiveness remains to be seen. Still, sustained stability in property prices is indeed anticipated. This is viewed as a crucial precursor to a turnaround in the sector. Stabilized home prices shall indeed have positive ripple effects, potentially improving consumer sentiment and ultimately enhancing China’s growth outlook.

In India, sustained economic strength and recent political developments have continued to fuel positive investor sentiment. The country has in recent months continued to boast healthy activity, with the private sector maintaining a sustained expansion amid robust output from the manufacturing and service sectors. Meanwhile, Prime Minister Modi’s Bharatiya Janata Party (BJP)-led National Democratic Alliance retained its parliamentary majority although the BJP lost its single party majority. On the policy front, the Reserve Bank of India kept its benchmark policy repo steady as price pressures prove persistent while the economy remained resilient.

Latin America presented a nuanced economic picture in Q2, with a broader slowdown emerging compared to the earlier part of Q1. Brazil, the region’s powerhouse, exhibited continued resilience, with activity – aided by the services segment – revolving in expansionary territory. Meanwhile, inflation picked up from the 3.69% jump in April to mark the first acceleration in Brazilian consumer prices since September of 2023. Mexico, still in expansion, saw a marginal 0.1 pt dip in manufacturing (51.1 v a previous month reading of 51.2) as new orders continued to rise. From a policy perspective, Chile – among the first to ease policy – carried out a 25bps cut, which brings them to 5.75%. Brazil and Mexico, previously embarking on an easing cycle, kept rates steady, in line with expectations.

Fund performance

In June, the CC Emerging Market Bond Fund realized a gain of 0.79%. Throughout the month, the Manager continued to take advantage of selective opportunities, primarily by participating in initial offerings. Indeed, the month saw a number of market participants coming to market, with liquidity and appetite increasing. Credit issuers which the CC Emerging Market Bond Fund increased its exposure to include; Teva Pharmaceuticals, Freeport Indonesia PT, and Arcelormittal SA.

Market and investment outlook

Looking ahead, the evolving global interest rate environment, particularly decisions by the Fed, will be crucial to monitor. A hawkish Fed stance may lead to a sustained period of higher rates globally, potentially translating into a stronger US dollar. 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. Despite rate cut expectations falling over the year, optimism remains.