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).

"Despite higher interest rates, but above all thanks to the improved economic performance, default rates in both the USA and Europe have barely risen." 

Hannes Kusstatscher, fund manager ERSTE RESPONSIBLE BOND GLOBAL HIGH YIELD

Fund & Performance

The ERSTE RESPONSIBLE BOND GLOBAL HIGH YIELD is a bond fund whose investment universe is composed according ethical and sustainable criteria. Primarily, the fund invests in high-yield corporate bonds denominated in EUR, GBP or USD. Foreign currency risks are hedged on a strategic basis in most cases. The rating is primarily in the high-yield range (BB and lower). 

Note: Past performance is not a reliable indicator of future performance.

Performance since start of the fund (11.5.2020). 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 Hannes Kusstatscher

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

ERSTE RESPONSIBLE BOND GLOBAL HIGH YIELD has already gained just over 2% in the year to date thanks to falling credit spreads and high yields. The good performance in 2023 thus continued this year. Although interest rates for government bonds have risen slightly since the start of the year, the now high yield of about 2% (as of 30 June 2024) is a stable basis for high current income and thus acts as a buffer against rising interest rates. (Note: Pleae note that an investment in securities entails risks in addition to the opportunities described.)

The year began with market participants increasingly pricing in more interest rate cuts for 2024 thanks to optimistic communication from the central banks. This led to low interest rates at the start of the year. However, these interest rate cut expectations were thwarted by better economic data, first in the USA and then also in the Eurozone, and by poorer inflation data. The 10Y US interest rate rose from 3.9% at the start of the year to 4.7% in April. In the meantime, however, the ECB has already cut interest rates, and the further weakening of inflation in the USA has resulted in 10Y US interest rates now standing at 4.2%.

 

How did the high-yield segment perform in this environment?

Despite higher interest rates, but above all thanks to the improved economic performance, default rates in both the USA and Europe have barely risen and are currently hovering around 3% and 2%, respectively. Most companies in the high-yield segment are benefiting from higher profit margins and strong demand, which is being bolstered above all by the low unemployment rate. The debt ratio is also falling on average and many companies that have debt falling due in the coming years are refinancing early in order to avoid liquidity bottlenecks. Rating changes also continue to look quite positive, and we can currently still see slightly more upgrades than downgrades, even if the difference has now narrowed.

 

What is your focus in the fund currently?

For the fund, we still favour banks, which are benefiting from the stable environment and persistently high interest rates. We are also selectively overweight in the consumer goods sector. Both are benefiting from higher margins and strong consumer data. The holiday industry is also continuing to recover well, and the booking situation is also strong this summer. We are also somewhat more heavily invested in the automotive sector. While European companies in particular are currently facing increased competition from China, many suppliers are broadly diversified, and yields in the sector remain attractive.

We are particularly cautious though in the lowest rating segment, CCC. Higher interest rates are causing problems and debt rescheduling for companies with ambitious leverage, often necessitating restructuring. In the USA, the media, healthcare, and telecoms sectors are particularly affected. Due to the tightening of the ESG exclusion criteria for oil & gas, the fund is no longer invested in the energy sector.

 

What are your expectations for the rest of the year?

The current environment remains favourable for high-yield bonds. Falling inflation rates and a continued strong economy provide a supportive environment for default rates to remain low and credit spreads not to widen. If the central banks were to cut interest rates in the autumn as expected, this would also be positive as it would increase bond prices and reduce financing costs. Lower inflation rates also boost the flexibility of central banks to react more quickly to a possible economic slowdown. (Note: Pleae note that an investment in securities entails risks in addition to the opportunities described. Prognoses are not a reliable indicator of 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.