News Overview

EM Corporate Bond Newsletter

January 2025

EM Corporate Bond Newsletter

January 2025

Monthly report of the fund management

Our market ended December 2024 with a loss. The absolute performance for EM corporate bonds was around -0.9% and was mainly caused by a strong correction on the US bond market, as yields shot up by 40 basis points. Risk premiums remained stable but traded in a volatile range of 190-210 basis points towards the end of the year due to lower liquidity.

 

Macro Overview

As expected, the Fed lowered key interest rates by 25 basis points to 4.5%. However, the statements made at the press conference were more hawkish than expected. Powell emphasized that the economy was still very stable and strong, but that price increases remained above the desired level, particularly in the services sector. Based on credit card analyses, US consumption was very robust in December, confirming the Fed's statements.

The yield curve has steepened in recent weeks, as investors are increasingly unsettled about the US policy (tariffs, national budget, foreign policy) of the coming administration and are now demanding a higher risk premium for longer maturities. It remains to be seen to what extent inflation can continue to fall in a labour market with limited immigration and consumption supported by an environment of rising asset prices.

In commodities, energy prices were well supported by colder weather, metals were virtually unchanged, only copper weakened slightly.

Emerging Markets Overview

China continues to promote domestic consumption with trade-in auctions ("old for new") in consumer goods (cars, household appliances, even mobile phones). However, this measure only appears to be slowing down the ongoing slowdown and is not perceived by the market as an upturn. This is reflected in local yields, which are falling to new lows (see chart 1). This is because they reflect market opinion and the expectation of a "Japanisation" of the economy. Although the volume of foreign trade is also increasing, the deflationary tendencies in prices remain. 

Chart 1: China 30YR government yields now below Japan 30YR yields. Source: LSEG Datastream

Notes: Forecasts and past performance do not allow any reliable conclusions to be drawn about the future performance of the funds mentioned. The indices shown serve as a key figure to illustrate the performance of selected financial instruments. They are used to document the representative performance of this specific market in the global financial arena. The following changes reflect the performance of the financial instruments contained in the hypothetical portfolio; no direct investment is possible.

Meanwhile, there are increasing reports of attacks by Chinese hackers on US telecoms companies and even the US Treasury Department. There have also been reports of the use of private security units to support and control investments with political objectives. It clearly shows China's global ambitions and its increasing positioning vis-à-vis the US.

Brazilian bonds showed significant weakness in December after Lula's government's budget reforms turned out to be thinner than expected. The central bank had to continue to raise interest rates sharply (by 175 basis points to 12.25% since September, peaking at 14% in 2023) and intervened heavily in the currency market to prevent the currency from weakening even further (see chart 2). 

Chart 2: After the market interventions, the foreign exchange Reserves of the Brazilian central bank shrank significantly. Source: LSEG Datastream

Notes: Forecasts and past performance do not allow any reliable conclusions to be drawn about the future performance of the funds mentioned. The indices shown serve as a key figure to illustrate the performance of selected financial instruments. They are used to document the representative performance of this specific market in the global financial arena. The following changes reflect the performance of the financial instruments contained in the hypothetical portfolio; no direct investment is possible.

We had already been neutral or slightly underweight in our funds and mandates due to excessive valuations. This was also the case with Petrobras, where we had no bonds in the fund. Here, however, we took advantage of the opportunity to widen risk premiums by 40 basis points and built up a slight overweight. In our view, the market sent a strong signal to President Lula, as the rise in local interest rates will worsen the finances of weaker companies with floating-rate debt, dampen consumption and ultimately bring politicians to their senses. Most recently, Donald Trump also threatened the country with tariffs.

Côte d'Ivoire is jumping on the ecological bandwagon of refinancing old, often expensive debt and will issue impact bonds for the environment, the country's development and to improve the living conditions of the population. The country is planning two transactions totaling up to $1.2 billion. We have already been overweight in government bonds for some time.

Overview of EM Companies

Fitch downgraded the rating of Sisecam (Turkey) from BB-/positive to B/negative after the real appreciation of the Turkish lira and the weak export economy led to a sharp deterioration in profitability. Arcelik (known for household appliances, also under the BEKO brand) was also downgraded from BB to BB- for similar reasons. We had this development on our radar and had therefore not invested for a long time.

The bonds of Anadolu-Efes also came under pressure after Russia forced a local company to take control of the joint venture between Anheuser-Busch Inbev and Efes. This is remarkable in that Anadolu-Efes had parked most of its cash reserves with this very Russian subsidiary.  Unlike Petrobras, however, we are holding back from investing here for the time being, as spreads have shot up by over 100 basis points. We would like to keep a closer eye on developments here. 

Outlook & Performance

The market is traditionally very illiquid in December and many bonds barely reacted to the change in US yields at the beginning of the year. After initial losses, we ended the year with a performance in line with the market from the second quarter onwards. We expect increased volatility in the coming months, which could, however, offer good opportunities for investors to enter or gradually increase their holdings. The reasoning behind this is that risk premiums in emerging markets have already been tighter (thus making a positive contribution to performance) while US yields have been higher (see chart 3). The specific effects of the new US government's trade and geostrategic policy will also determine the framework conditions for the performance of our asset class in the coming months. 

Chart 3: Despite rising US yields, EM risk went tighter in 2024 and made a positive contributon to performance. Source: LSEG Datastream

Notes: Forecasts and past performance do not allow any reliable conclusions to be drawn about the future performance of the funds mentioned. The indices shown serve as a key figure to illustrate the performance of selected financial instruments. They are used to document the representative performance of this specific market in the global financial arena. The following changes reflect the performance of the financial instruments contained in the hypothetical portfolio; no direct investment is possible.

Performance opportunities for the funds:

  • Rising absolute yields and stable risk premiums offer entry opportunities down the road

Performance risks for the funds:

  • High market volatility due to the expected policies of the new US administration

Overview Performance

ERSTE BOND EM CORPORATE

Note: Past performance does not allow any reliable conclusions to be drawn about the future performance of the funds. The performance is calculated according to the OeKB method. The performance assumes a full reinvestment of the distribution and takes into account the management fee and any performance-related remuneration. The one-off front-end load that may be incurred upon purchase and any individual transaction-related or ongoing income-reducing costs (e.g. account and custody account fees) are not included in the presentation.

Institutional share classes

AT0000A1W4B7 = Distributing share (A)
AT0000A1W4C5 = Accumulating share (VT)

Retail share classes

AT0000A05HQ5 = Distributing share (A)
AT0000A05HS1 = Accumulating share (VT)

ERSTE BOND EM CORPORATE IG

Note: Past performance does not allow any reliable conclusions to be drawn about the future performance of the funds. The performance is calculated according to the OeKB method. The performance assumes a full reinvestment of the distribution and takes into account the management fee and any performance-related remuneration. The one-off front-end load that may be incurred upon purchase and any individual transaction-related or ongoing income-reducing costs (e.g. account and custody account fees) are not included in the presentation.

Institutional share classes

AT0000A1Y9D0 = Distributing share (A)
AT0000A1Y9H1 = Accumulating share (VT)

Retail share classes

AT0000A0WJX7= Distributing share (A)
AT0000A0WJZ2 = Accumulating share (VT)

ERSTE RESPONSIBLE BOND EM CORPORATE

Note: Past performance does not allow any reliable conclusions to be drawn about the future performance of the funds. The performance is calculated according to the OeKB method. The performance assumes a full reinvestment of the distribution and takes into account the management fee and any performance-related remuneration. The one-off front-end load that may be incurred upon purchase and any individual transaction-related or ongoing income-reducing costs (e.g. account and custody account fees) are not included in the presentation.

Institutional share classes

AT0000A1PY56 = Distributing share (A)
AT0000A2MKX2 = Accumulating share (VT)

Retail share classes

AT0000A13EF9 = Distributing share (A)
AT0000A13EH5 = Accumulating share (VT)

Overview performance contribution in %

Performance contribution at country level

(relative to the benchmark)

Performance contribution at share level

(relative to the benchmark)

Source: Erste AM; Calculation period December 2024; Contribution to gross excess returns in %, Fund: ERSTE BOND EM CORPORATE, Benchmark: J.P.Morgan CEMBI Broad Diversified Composite Index hedged in EUR; Gross performance data (without deduction of management fee); The companies listed here have been selected as examples and do not constitute an investment recommendation. In the context of active management, the above portfolio positionings may change at any time. 

Fund management

Lead-Manager Péter Varga

...has been a member of the Credits team at Erste Asset Management since 2005. As a Senior Professional Fund Manager, he is responsible for various emerging market corporate bond strategies in the team. He has more than 20 years of investment experience. Before joining the company, Péter Varga was responsible for convertible bond and corporate bond funds and the management of two total return funds at Union Investment (Frankfurt/M.).

Co-Manager Thomas Oposich

...is a senior fund manager in the fixed income division of Erste Asset Management. His current focus is on emerging market corporate bonds. Thomas Oposich has been with the company since 2005 and has many years of experience in bond management. During his career, he has been responsible for a broad range of bond funds consisting of US government, money market and corporate bonds, as well as mortgage-backed securities and euro government bonds.

Co-Manager Agne Loibl

...has been with Erste Asset Management since 2010. As a Senior Fund Manager in the Credits team, she is responsible for emerging market investment grade corporate bonds and the Asian markets. Agne Loibl has extensive experience in the area of credits. She started her career in research at ESMT Customized Solutions in Berlin and moved to Risk Management Securitisations at Erste Bank in 2007. 

Relevant new issues

There were no new issues underwritten.

OverviewErste AM EM corporate strategies

Source: Erste Asset Management; Data as of 30.11.2024

Ratings

For a further analysis, you can view our fund at:

Morning Star Rating:                5 Stars
Morning Star Sust. Globes:     3 Globes
Scope Rating:                           A – 79/100

Contact us

Personal contact with you is particularly important to us.
If you have any questions about our investment solutions, our team will be happy to help you.

E-Mail: institutional@erste-am.com

Risk notes for the mentioned funds

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. All data is sourced from Erste Asset Management GmbH, unless indicated otherwise. 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. Please note that investments in securities entail risks in addition to the opportunities presented here. The value of shares and their earnings can rise and fall. Changes in exchange rates can also have a positive or negative effect on the value of an investment. For this reason, you may receive less than your originally invested amount when you redeem your shares. Persons who are interested in purchasing shares in investment funds are advised to read the current fund prospectus(es) and the Information for Investors pursuant to § 21 AIFMG, especially the risk notices they contain, before making an investment decision.

Please consult the corresponding information in the fund prospectus and the Information for Investors pursuant to Art 21 AIFMG for restrictions on the sale of fund shares to American or Russian citizens. Misprints and errors excepted.

The public sale of shares in the specified fund in Germany was registered with the Federal Financial Supervisory Authority, Bonn, pursuant to the German Kapitalanlagegesetzbuch (KAGB). The issue and redemption of unit certificates and the execution of payments to unit holders has been transferred to the Fund's custodian bank/depositary, Erste Group Bank AG, Am Belvedere 1, 1100 Vienna, Austria. Redemption requests can be submitted by investors to their custodian bank, which will forward them to the Custodian Bank/Depositary of the Fund for execution via the usual banking channels. All payments to investors are also processed via the usual banking clearing channel with the investor's custodian bank.. In Germany, the issue and return prices of shares are published in electronic form on the website www.erste-am.com (and also at www.fundinfo.com). Any other information for Shareholders is published in the Bundesanzeiger, Cologne.

Presentations:

It is expressly noted that presentations shall not be construed as providing investment advice or investment recommendations; presentations simply represent the current market opinion. The presentations are not intended as sales instruments and shall therefore not be construed as an offer to buy or sell financial or investment instruments. The investor shall be solely responsible for any and all decisions that he makes on the basis of this presentation.