Malta Government Bond Fund

The Fund aims to maximise the total level of return for investors through investment, primarily, in debt securities and money market instruments issued by the Government of Malta. The Investment Manager may also invest directly or indirectly via eligible ETFs and/or eligible CISs) up to 15% of its assets in “Non-Maltese Assets” in debt securities and/or money market instruments issued or guaranteed by Governments of EU, EEA and OECD Member States other than Malta. The Investment Manager will not be targeting debt securities of any particular duration, coupon or credit rating.

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

A widely acknowledged “higher rates for longer” view, drove yields notably higher in the third quarter. Albeit at times short-lived, as a contraction of private-sector activity in the euro area intensified, leading investors to bet that the ECB will pause its campaign of interest-rate hikes and thus a retraction, yields overall remained elevated. Maintaining an upward trajectory.

In September’s policy meeting, the European Central Bank (ECB) hiked interest rates for a tenth consecutive time, yet signaled that it is likely done tightening policy as inflation has started to decline but it is still expected to remain “too high for too long”. Consequently, setting the main refinancing operations rate at 4.5%, a 22-year high.

From a performance standpoint, government bond yields of European sovereigns rose (meaning prices fell), underperforming riskier assets.

Market environment and performance

Concerns of a potential recession, which had been somewhat dismissed earlier in the year due to the resilience of economic activity, have now reemerged. The downward revision of the Q2 GDP growth rate, mainly attributed to weak exports and stagnant domestic consumption, has contributed to these worries. The ongoing decline in private sector activity has further cast doubt on the likelihood of a positive Q3 growth rate figure.

Purchasing Managers’ Index (PMI) indicators continued to show signs of weakness amid a second successive contraction in services (reading 48.7 v a previous month reading of 47.9) for 2023 and a continued downturn in manufacturing (reading 43.4 v a previous month reading of 43.5). Overall, new orders dropped while backlogs of work experienced the largest decline since June 2020. The rate of job creation was the joint second-slowest in the current 32-month sequence of growth. From an inflationary front, input prices accelerated to a four-month high, while selling prices rose the least in over a year consequent to a weak demand environment.

Despite a notable increase in oil prices, there were positive developments on the inflation front, as year-on-year core measures showed signs of easing in the majority of economies. Annual inflation rate in the Euro Area declined to 4.3%, reaching its lowest level since October 2021 and below market estimates of 4.5%. Prices increased at a slower pace for services, non-energy industrial goods, and food, alcohol & tobacco. Core inflation – a highly monitored figured by the ECB – eased, dropping to 4.5% from 5.3% in the previous month.

In the month, Germany’s benchmark 10-year yield widened notably as it approached the 3% mark, at 2.84%. Yields of sovereigns within the Euro area’s periphery too widened, with Italy’s and Greece’s heading substantially north, closing the quarter at 4.78% and 4.34%, 66bps and 57bps higher, respectively.

Fund performance

In the month of September, the CC Malta Government Bond Fund registered a loss of 1.18%, in line with the widening observed among European sovereign bond yields, and outperforming the MSE Malta Government Stocks Total Return Index seeing a loss of 1.42% over the month.

Throughout the month, the Manager sought to reduce its cash exposure by increasing the portfolio’s exposure to Maltese government bonds. The latter, in addition to shifting the portfolio’s European sovereigns to longer-dated issues, aided in increasing the portfolio’s overall duration yet in a balanced manner.

Market and investment outlook

The Manager’s forward-looking view is to continue to play the duration play depending on market conditions. Indeed, adjusting the portfolio’s duration in line with adjustments in inflationary expectations shall continue to prove crucial for relative outperformance.