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).

"The speed of the interest rate reductions will actually depend on how sustainably inflation rates will continue to fall and how resilient the economy will prove to be."

Helwig-Dieter Ziering, fund manager ERSTE BOND COMBIRENT

Fund & Performance

ERSTE BOND COMBIRENT primarily invests in government bonds denominated in euros that are issued or guaranteed by issuers from Europe and that are mainly rated in the investment grade segment (or a comparable segment) by recognized rating agencies in terms of their creditworthiness. 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 Helwig-Dieter Ziering

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

Following the extraordinary tightening of the monetary policy to date, the European Central Bank has kept the key-lending rate unchanged at 4.50% in the first half of the year until the end of May 2024. At the beginning of June, the ECB decided to cut the rate by 0.25% for the first time in around five years, as expected.

Due to the very sluggish decline in inflation (especially core inflation) and an economic trend that exceeded expectations, some of the interest rate cuts expected by the end of 2024 were cancelled and priced out by the market again.

In this market environment, yields in the Eurozone came under renewed pressure after a sharp decline at the end of 2023, picking up again from January to the end of May, which resulted in a negative YTD return.

 

On what did you focus in the fund in this environment?

The fund's duration management was continuously adapted to the monetary policy and economic environment, as was the management of the country weights within the Eurozone.

We also made investments in inflation-linked bonds in order to hedge against the risk of inflation rates not falling as quickly anymore or rising slightly again.

We maintained a portfolio of Austrian mortgage bonds and government-guaranteed bonds from the Eurozone in order to benefit from the previously attractive interest rate differential to Austrian government bonds. Since the beginning of the year, however, this share has been reduced from about 20% of assets under management in the fund to about 15% after the interest rate differential to Austrian government bonds had narrowed as expected and thus contributed positively to overall performance.

In this market environment, ERSTE BOND COMBIRENT failed to achieve a positive performance in the year to date (as of 30 June 2024).

 

What are your expectations for the second half of 2024?

After the generally expected first key-lending rate cut in June, the market does not expect a series of rate cuts until the end of 2024 anymore. However, from today's perspective, at least one further cut seems possible by then.

The speed of the interest rate reductions will actually depend on how sustainably inflation rates (including core inflation rates) will continue to fall and how resilient the economy will prove to be.

 

What are your priorities in the fund based on this?

Based on this, the strategic orientation of the ERSTE BOND COMBIRENT will continue to focus on duration and yield curve management as well as the management of the country weightings within the Eurozone in the second half of 2024.

The – despite the reduction – still high proportion of mortgage bonds also remains a strategic focus for the second half of 2024 and will be adjusted accordingly depending on the development of the interest rate differential from here on out.

ERSTE BOND COMBIRENT

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.