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).

"Most investment-grade companies are still in a solid position." 

Michiel van der Werf, fund manager ERSTE BOND EURO CORPORATE

Fund & Performance

ERSTE BOND EURO CORPORATE mainly invests in corporate bonds of European issuers with high to medium credit ratings, which are denominated in euros. The rating (creditworthiness) of the bonds in the fund is primarily in the investment grade area. Any foreign currency risks are mostly hedged. 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 Michiel van der Werf

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

The very good performance of investment-grade corporate bonds ensured that the fund was able to break even in the first half of the year, despite the rise in interest rates for government bonds in the year to date. (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.

Towards the end of the reporting period, the ECB cut interest rates for the first time since 2019. Following the interest rate cut of 25bps in June, the ECB gave little guidance on its future interest rate policy. However, modest upward revisions to GDP growth in 2024, stubbornly higher-than-expected inflation rates, and comments made by ECB President Christine Lagarde at the press conference suggest that the ECB is in no hurry to make further interest rate moves.

 

What was you focus in terms of fund management?

We were overweight in the banking and insurance sector and remain so. The banks are still benefiting from the higher interest margins and, as possible interest rate cuts are likely to be pushed back further, this will continue for the time being. The notion of higher interest rates over a longer period of time seems to have regained its appeal.

 

What are your expectations for the rest of the year 2024?

Most investment-grade companies 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. The rating cycle is even improving at the moment, and the drift ratio (rating upgrades minus downgrades divided by the rated universe) in Europe is currently close to the highest level ever recorded.

The macroeconomic backdrop thus remains in the economic Goldilocks zone of neither too cold (growth is improving), nor too hot (monetary easing, but under control). Valuations in the investment grade segment are in the average rather than the high range, and assets are therefore not overpriced for the environment. We continue to regard ERSTE BOND EURO CORPORATE as a good recommendation with a yield of just under 4% (as of 30 June 2024). (Note: Please note, that an investment in securities entails risks in addition to the opportunities described.)

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.