After a difficult year of 2022 on the markets, many asset classes saw rebounding performances in 2023. While the central banks' turnaround on interest rates ensured a “return to normality” on the bond market, the focus on the equity market was primarily on technology companies. In the Funds exclusive series, the fund managers of selected funds look back on developments of the previous year and give their assessment of what the markets could expect in 2024. (Note: Prognoses are not a reliable indicator of future performance.)

After a difficult year of 2022 on the markets, many asset classes saw rebounding performances in 2023. While the central banks' turnaround on interest rates ensured a “return to normality” on the bond market, the focus on the equity market was primarily on technology companies. In the Funds exclusive series, the fund managers of selected funds look back on developments of the previous year and give their assessment of what the markets could expect in 2024. (Note: Prognoses are not a reliable indicator of future performance.)

"We are positive on bonds with a longer remaining time to maturity. This applies to utilities and telecoms, for example. We remain cautious on property companies."

Bernd Stampfl, fund manager ERSTE BOND CORPORATE BB

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.

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 past year?

The fund performed satisfactorily at the start of 2023. The exceptionally strong performance of BB bonds and lower ensured that the fund had already seen strong movement in Q1 2023. It was only the concern about interest rate hikes and rising defaults due to higher refinancing levels that caused spreads on bonds in the high-yield spectrum to widen.

Both the European Central Bank and its US counterpart continued to focus on raising key-lending rates while at the same time curtailing market volatility. However, the pressure that was passed on from government bonds to European high-yield bonds was negligible. Only bonds of better quality incurred losses here. The higher spreads on high-yield bonds provided a risk cushion that was large enough in this market environment. As a result, bonds managed to avoid a correction in this market environment.

A further trend reversal emerged when the focus turned to the USA in March 2023; or more specifically, on Silicon Valley Bank and First Republic Bank. Their stumbling and the subsequent emergency takeover of the Swiss Credit Suisse by UBS ensured that the spreads of BB versus B bonds began to widen again. At no time did the fund hold any shares in the above-mentioned risk positions.

The brief correction made for a more attractive entry level again. Issuers used this window of opportunity plus the slowing inflation, which resulted in higher market liquidity, to issue new bonds or strengthen their balance sheets.

 

How did the ERSTE BOND CORPORATE BB perform in this environment?

However, even in this aforementioned market environment, the fund failed to avoid a loss. The liquidity of bank shares also froze in the short term. However, this problem was resolved again towards the end of the period under review.

The still excessive but declining inflation figures and resilient growth, particularly in the US, remained the biggest drivers of the markets. Unemployment also remains very low, even though the first signs of a slight economic downturn are visible. This is where the central banks have a role to play – even if, in the current market environment, it looks like they will have successfully completed their task in 2023. And investors now expect the first interest rate cuts to be possible again as early as in mid-2024. This should help the bonds and take some of the pressure to raise interest rates out of the bonds.

 

What development do you expect in the coming year?

Most companies in the BB segment are still in a solid position. Even if sales are falling slightly in some cases and profit margins remain under pressure, many are able to pass on price increases. In view of the pressure on interest rates and margins outside the bond market, companies are also able to obtain bridge 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 leading indicators for 2024 deteriorate, an increase in so-called “fallen angels” is to be expected. This and a deterioration in investor sentiment could increase the pressure on existing securities in the universe. At the moment, however, we do not expect higher spreads in the BB segment for 2024.

We are positive on bonds with a longer remaining time to maturity. This applies to utilities and telecoms, for example. We remain cautious on property companies.

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.