While the stock markets climbed to new record highs in the first half of the year, the first central banks also initiated a turnaround in monetary policy by cutting interest rates. Will the environment remain positive?

In the Funds exclusive series, the fund managers of selected funds look back on developments in the first half of 2024 and give their assessment of what the markets could expect in 2024. (Note: Prognoses are not a reliable indicator of future performance).

Fund & Performance

ERSTE BOND CORPORATE BB mainly acquires corporate bonds of international issuers with the rating ""BB"". Bonds with a BBB or B rating may also be purchased. Any foreign currency risks are mostly hedged. The fund's task is to generate current income in euros. Ecological and social factors as well as corporate management factors are integrated into the investment process.

Note: Past performance is not a reliable indicator of future performance.

Performance since start of the fund. The performance is calculated in accordance with the OeKB method. The management fee as well as any performance-related remuneration is already included. The issue premium which might be applicable on purchase and as well as any individual transaction specific costs or ongoing costs that reduce earnings (e.g. account- and deposit fees) have not been taken into account in this presentation.

Commentary by fund manager Bernd Stampfl

How would you sum up the first half of the year?

The very good performance of BB-rated bonds and below led to a positive performance in the first half of the year. (Note: Please note that an investment in securities entails risks in addition to the opportunities described.)

The global economy has proven its resilience despite uncertainties. The US Federal Reserve appears to have reached the end of its restrictive monetary policy, and the Eurozone and the European Central Bank are likely to follow suit, as was already apparent from the first interest rate cut of 0.25% in June. If the financial systems were to prove less resilient than previously assumed, central banks could be prepared to cut interest rates quickly.

The rally at the end of 2023 was carried over into 2024 and even intensified again in the first three months. However, we did also see some distortions in certain market segments. In February 2024 in particular, banks specialising in commercial real estate lending came under some pressure. Overall, however, the picture for banks was positive over the reporting period.

The end of the liquidity injections could lead to a widening of risk premiums (i.e. spreads) on high-yield bonds and thus to lower prices of riskier assets in general. In line with our more cautious stance, we continue to favour high-quality, non-cyclical companies with high liquidity and fundamentally sound balance sheets in the fund. We also like defensive sectors such as telecoms and utilities.

In March 2024, the risk sentiment began to turn a little. Investors began to take a closer look at issuers, especially at those with increased refinancing requirements. Due to the increased refinancing costs, companies are under particular pressure to find adequate solutions.

Towards the end of the reporting period, the market calmed down a bit again. Geopolitical tensions moved somewhat to the background, while pressure on the interest rate markets eased. The notion of higher interest rates over a longer period appears to have regained its appeal.

 

What development do you expect for the coming months?

Most companies in the BB segment are still in a solid position. Even if sales are declining slightly in some cases and profit margins remain under pressure, many are able to pass on the price (or, cost) increases. In view of the pressure on interest rates and margins outside the bond market, companies are also able to obtain interim financing via bank loans. This minimises the pressure on risk premiums and helps to keep the issuer rating stable. For 2024, we therefore do not currently anticipate massively higher default rates. As the refinancing pressure is lower here, the BB segment should outperform bonds with a lower rating.

Should the conditions for the second half of 2024 deteriorate, an increase in so-called fallen angels (companies whose rating deteriorated from investment grade to high yield) is to be expected. This and a deterioration in investor sentiment could increase the pressure on existing bonds in the universe. For the time being, however, we do not expect higher spreads in the BB segment for 2024.

We prefer bonds with a longer remaining time to maturity. This applies to utilities and the telecom sector, for example. We also expect energy shares to perform well. We remain cautious about automotive bonds.

ERSTE BOND CORPORATE BB 

Important legal note:

Prognoses are not a reliable indicator for future performance.

Disclaimer

This document is an advertisement. Please refer to the prospectus of the UCITS or to the Information for Investors pursuant to Art 21 AIFMG of the alternative investment fund and the Key Information Document before making any final investment decisions. Unless indicated otherwise, source: Erste Asset Management GmbH. Our languages of communication are German and English.

The prospectus for UCITS (including any amendments) is published in accordance with the provisions of the InvFG 2011 in the currently amended version. Information for Investors pursuant to Art  21 AIFMG is prepared for the alternative investment funds (AIF) administered by Erste Asset Management GmbH pursuant to the provisions of the AIFMG in connection with the InvFG 2011. The fund prospectus, Information for Investors pursuant to Art  21 AIFMG, and the Key Information Document can be viewed in their latest versions at the website www.erste-am.com within the section mandatory publications  or obtained in their latest versions free of charge from the domicile of the management company and the domicile of the custodian bank. The exact date of the most recent publication of the fund prospectus, the languages in which the Key Information Document is available, and any additional locations where the documents can be obtained can be viewed on the website www.erste-am.com. A summary of investor rights is available in German and English on the website www.erste-am.com/investor-rights as well as at the domicile of the management company.

The management company can decide to revoke the arrangements it has made for the distribution of unit certificates abroad, taking into account the regulatory requirements.

Detailed information on the risks potentially associated with the investment can be found in the fund prospectus or Information for investors pursuant to Art 21 AIFMG of the respective fund. If the fund currency is a currency other than the investor's home currency, changes in the corresponding exchange rate may have a positive or negative impact on the value of his investment and the amount of the costs incurred in the fund - converted into his home currency.

Our analyses and conclusions are general in nature and do not take into account the individual needs of our investors in terms of earnings, taxation, and risk appetite. Past performance is not a reliable indicator of the future performance of a fund.