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 EM GOVERNMENT primarily invests in government bonds from global emerging markets. In addition, corporate bonds from issuers in this region can also be added. The securities include both investment grade and high yield bonds.

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 Felix Dornaus

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

The expected normalisation of monetary policy, primarily by the US Federal Reserve, continues to have a strong impact on the financial markets in the emerging economies. Central banks are cautiously signalling that interest rate cuts can be expected from the middle of the year.

The expectation of rate cuts and a potentially gloomier economic outlook were the main yield drivers in the first half of the year. The development of the geopolitical situation (Ukraine, Gaza, Taiwan) and upcoming elections (USA!) generated an additional influence. The central banks in most emerging markets repeatedly acted in a more anticipatory fashion than those in the developed markets, having already initiated a mild cycle of interest rate cuts.

Global and local interest rate cuts mean a tailwind for the emerging markets' ability to refinance. The increased debt levels in most emerging markets following the COVID crisis have stabilised or even decreased. The relative level of debt (i.e. debt to GDP) is still lower than in the developed economies.

The continued positive development of the local capital markets offers a functioning refinancing option as well, also in the sense of decreasing dependence on external capital markets. The level of debt is not regarded as system-critical, but rather as manageable. Individual countries (Egypt!) have been able to massively improve their strained budget situation and shaky candidates (Pakistan, Sri Lanka, Zambia) are on the verge of successfully completing a debt restructuring programme. Current account balances show a positive trend on average (e.g. Mexico).

 

How did the fund perform in this environment?

The fund delivered a positive performance in the first half of 2024. This was largely due to the fact that the fund management team selectively reduced the underweights in the high-yield segment (rated Caa1 and below) and extended the overall interest rate sensitivity in the fund in order to take account of the easing pressure to raise interest rates.

 

What does the fund management team expect for the rest of 2024 in terms of global economy and trends?

For the second half of the year, the fund management team does not expect any significant changes to the performance drivers that we saw in the first half. This means that the global monetary policy, geopolitical tensions, elections in the USA, and the refinancing capacity of emerging markets issuers will remain the decisive factors. In principle, the current yield levels offer a fair value. In the balance between inflation and recession concerns, the markets are at a favourable intermediate stage. (Note: Prognoses are not a reliable indicator of future performance.)

This supports risky asset classes and commodities (relevant for the emerging markets). In light of the aforementioned developments in the monetary policy, the fund will continue to attach great importance to timely and appropriate duration management.

ERSTE BOND EM GOVERNMENT

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.