Growth Strategy Fund

The Fund aims to achieve long-term capital growth by investing in a diversified portfolio of collective investment schemes.

The Investment Manager (“We”) will invest in collective investment schemes (“CIS”) (including UCITS, exchange-traded funds and other collective investment undertakings) that invest in a broad range of assets, including debt and equity securities. In instances, this may involve investing in CISs that are managed by the Investment Manager.

The Investment Manager (“We”) aims to build a diversified portfolio spread across several industries and sectors.

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

September 2023

Introduction

In September, the conviction in financial markets regarding potential interest rate hikes drove fixed income yields higher and caused a decline in equity markets. The underlying economic conditions seemed to fade as a primary concern, as market momentum clearly shifted towards risk aversion. Despite continued signs of leading macro indicators softening, it can be argued that the global economy is still in relatively good shape compared to initial analyst expectations for the year. This scenario exemplifies how financial markets can sometimes act in complete dissonance to the economic backdrop.

The upward move in yield curves could however derail the current delicate balance in the real economy, as the propensity to lend and leveraging capacity are expected to be impacted in the future, setting up another undesired headwind for economic growth next year. This adds to the challenges faced by consumers, including rising energy prices and diminishing disposable income. However, equity markets appear unfazed, with the recent pullback not indicating significant stress among investors who might still be banking on a soft-landing scenario. The next earnings season which comes, for the first time this year, with expectations of corporate earnings growth compared to last year will be the first reality check of such assumption.

On the monetary front, the Federal Reserve (FED) has paused its rate hikes and signalled fewer rate cuts for the next year, a move widely expected after stating the need for more data to assess the impact on the US economy. Inflation has steadily decreased from its peak in the middle of last year and may reach the FED’s target rate without a significant rise in employment. Meanwhile, in Europe, the European Central Bank (ECB) raised interest rates to their highest level since the launch of the euro. Christine Lagarde hinted that rates may have peaked but indicated that borrowing costs would remain high for as long as necessary to bring inflation down to the 2% target.

Equity markets continued their decline from the previous month, with the technology and consumer discretionary sectors unable to limit their losses. However, this doesn’t necessarily compromise the year-to-date performance of major equity indexes, which still show positive returns, in contrast to bonds, which are in a different position. Even though this situation seems to reflect a classic negative correlation between these two asset classes, it remains challenging to provide a fundamental explanation that reconciles the expectations of asset holders. The emergence of a new financial term like the “Magnificent Seven,” encompassing mega-cap stocks such as Apple, Microsoft, Amazon, Alphabet, Meta Platforms, Nvidia, and Tesla, underscores the perception of these particular stocks as safe havens, an idea that was nearly inconceivable just two years ago. Time will tell whether this calls for a revision of financial textbooks or is simply another potential bubble waiting to burst.

Market Environment and Performance

Purchasing Managers’ Index (PMI) indicators continued to show signs of weakness amid a second successive contraction in services (reading of 48.7 versus the previous month reading of 47.9) and a continuing downturn in the manufacturing sector (reading of 43.4 versus a previous month reading of 43.5). Despite a notable increase in oil prices, the annual inflation rate in the Euro area declined to 4.3% reaching its lowest level since October 2021. Core inflation eased, dropping to 4.5% from 5.3% in the previous month.

In the U.S. aggregate business activity – while still evolving in expansionary territory – nearly stalled due to a weaker expansion in the services sector (reading of 50.2 vs 50.3 in August), and a sustained contraction in manufacturing (reading of 49.8 vs 47.9 in August). Annual inflation rate in the US remained at 3.7% in September, while core consumer prices eased further to 4.1% from the previous 4.3%.

Equity markets continued their summer funk, with September – a historically a challenging month for stocks – noting negative returns. One of the most significant factors contributing to the decline in equities was the surge in Treasury yields, reaching levels not seen in over two decades. This increase in yields placed greater scrutiny on the valuation of technology stocks. The spotlight now shifts to the upcoming earnings season, as it is expected to provide a clearer direction for the markets in the remainder of the year. The S&P 500 index saw a decline of 2.52%, with support coming from value sectors like energy and financials. In Europe, both the EuroStoxx50 and the DAX experienced losses of 2.85% and 3.51%, respectively, with indiscriminate value erosion across various sectors.

Fund Performance

Performance for the month of September proved negative, noting a 2.69% loss for the CC Growth Strategy Fund – in line with the moves witnessed across European and U.S. equity markets during such period.

Market and Investment Outlook

Looking ahead, the Manager maintains a belief in a softening macroeconomic environment that will eventually bring an end to the current cycle of monetary tightening. Even in the face of unexpected spikes in inflation caused by factors such as commodity prices due to geopolitical tensions, the worst-case scenario seems to be a soft landing, where global economic growth slows down but remains positive. Additionally, the Manager anticipates that new rounds of economic stimulus in the Chinese economy will likely support local consumers and indirectly benefit the global economy. The recent movements in fixed income markets are viewed as an overshoot, which could lead to a more promising performance in equity markets toward the end of the year. In addition to the standard focus on sectors and companies with strong cash flows and attractive valuation metrics, there will be an increased emphasis on mega-cap and technology companies that could benefit from a decrease in bond yields. The unusual market volatility observed over the past three years can be attributed to the negative aftermath of the pandemic era. Hence, the word ‘patience’ should resonate with investors, considering historical trends that ultimately indicate a positive outcome.