Global Opportunities Fund Institutional

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 securities listed by the same body
• 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 funds
• The fund may not carry out uncovered sales (naked short-selling) of securities or other financial instruments

October 2021

Even on the presumption that markets have already got accustomed to the idea of a normalizing pre-covid monetary pace scenario, over the medium term this seems to be welcomed more importantly on the basis of an improved economic scenario following the Covid-19 pandemic dent. The financial reporting season depicted overall a robust pick-up in activity, as expected, however investors’ concerns might have been more aligned to the outlook for the last quarter of the year. Indeed, while the consumers have been so far able to absorb inflationary forces, possibly more supported by public spending programmes, and other stimulus it is still unclear what would be the consumer behaviour once easy money is tightened On the backdrop of  still high commodities and food supplies prices, the negative impact on the global economy from supply chain disruption perspective is expected to continue well into the next year. Such headwinds for inflationary forces are mixed with an employment landscape dominated by diminishing recovery of jobs lost during the pandemic as people worldwide adopt a different attitude toward work. All this depict a potentially troublesome social reality into the future. 

From the monetary front, the prevalent view among economists remain that inflationary pressures will prove transitory and we’ll see price pressures diminish as we move through next year, hence enabling a steady lift-off in rates from central banks. If in emerging markets central banks have already buckled and started hiking interest rates, in developed economies it seems that the orthodoxy of not permitting inflation to stay above its long term target will be shelved ad interim. This is due not only to the fact that it is not clear how much of the current inflation is generated by worldwide supply chain disruptions, but also because generally some inflation will do well to alleviate public debt burdens which increased strongly in the last 2 years.

From the pandemic front as Merck and Pfizer announced more breakthroughs in the treatment against SARS-CoV-2 infection, recent bouts of new cases in developed economies have been met by markets with constant indifference. Markets are now more focused on navigating through the troubled waters of the post economic recovery world. Nonetheless, an exponential increase in cases might re-trigger some forms of restrictions, which can ultimately result in a change in market sentiment.

Market Environment and Performance

Business activity in the Eurozone, previously witnessing a strong recovery momentum and reaching its peak in July, continued moderating as October’s Composite PMI data – a useful gauge of economic health in the two key sectors – was revised slightly lower to 54.2, from a preliminary estimate of 54.3 and lower than the previous month reading of 56.2. Although revolving in expansionary territory, October’s reading maintained the recent downward trend, pointing to the slowest growth in private sector activity in six months.

Eurozone inflation was estimated at 4.1 per cent in October, 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 pace since March 2021, preliminary estimates showed.

Aggregate business activity in the US, as measured by the Composite Purchasing Managers Index (PMI), was revised higher to 57.6 in October, from a preliminary estimate of 57.3. October’s reading, supported by a sharper service sector upturn, pointed to the fastest pace of expansion in private sector activity since July.

Annual inflation rate in the U.S. surged to 6.2 per cent in October, above forecasts of 5.8 per cent, and higher from 5.4 per cent in the previous month. Upward pressure was broad-based, with energy costs recording the biggest gain. In 2021, inflation has largely been on the rise amid low base effects from an unprecedented 2020 and as the economic recovery picks up, restrictions ease, and demand surges.

Equity markets in October rebounded strongly following a nightmarish September. Tesla led the consumer discretionary charge into the month, accompanied by the strong rebound in the technology sector and follow on performance from large energy caps. Developed markets equities ended the month higher, pointing to a clear gap between them and EM equities. The S&P 500 managed a whopping 7.21%, as investors deemed the last month’s slump as a good entry point. All sectors rallied, but those with the highest market capitalization within the index performed better (consumer discretionary and technology). In Europe, the EuroStoxx50 and the DAX gained 5.00% and 2.81% respectively, as good macro indicators and positive financial releases from the corporate sector construed to a general feel-good market sentiment, led by consumer discretionary and technology.

Fund Performance

In the month of October the Global Opportunities Fund registered a 6.01 per cent gain. On a year-to-date basis the fund’s performance closed with a 17.69 per cent gain. Following recent excess market volatility, the Manager continued to gradually reposition the Fund toward a more stable allocation and a better hedge on interest rate volatility. The Fund’s geographical tilt towards Europe has been reduced to rebalance the US exposure, as the fundamental conviction is aligned to a better economic performance in the latter going forward. As well, the Manager decreased the “reflationary trade”-related tactical allocation, taking some profits from its Home Depot, Volkswagen and Total Energies positions.  

Market and Investment Outlook

Going forward, the Manager is of the view that the economic growth momentum shall continue subsiding, albeit remaining on a positive note, on the backdrop of continuing inflationary pressures stemming from high commodity prices spilling over to products and services pricing, as well as renewed supply chain disruptions. However, the general macro environment is expected to remain supportive in spite of covid-19 cases rising. More positively new legislation from the US Congress (already passed) or easing fiscal conditions in China are bound to slowly take over the baton from monetary policies and further sustain economic growth. In Europe, combined action toward capping the rampant climb in energy prices is expected to give consumers some breathing room. All in all, the Manager believes that in the medium term, economic conditions might be still supportive, however consumer trend behaviours on the back of the increased prices should be monitored .given their high sensitivity to global growth.

The Manager believes that the current economic phase and market sentiment continue favouring equities to the detriment of other asset classes, the more so as real interest rates sink deeper into negative territory. Although good markets performance this year has been clearly driven by earnings expansion (albeit from a strong base effect), amongst others, there is a common understanding that earnings expectations going forward will hardly be able to match the recent historical levels. This lays a natural cap to potential market returns going forward which pushes the Manager possibly towards its stance of cautiousness regarding sector and stock selection. Nonetheless, the Manager is of the view that the current fund allocation is well positioned to respond to market challenges ahead.