The super election year of 2024 lies behind us. In addition to another interest rate hike by the major central banks in the USA and Europe, it brought a potentially landmark election victory for Donald Trump in the US presidential election. What is in store for 2025?
In the Funds check series, the fund managers of selected funds look back on the developments of the past year and give their assessment of what to expect from the stock exchanges in 2025. (Please note: forecasts are no reliable indicator of future performance.)
(c) Photo: Stephan Huger
"Trump 2.0 will bring more volatility to the asset class.”
Péter Varga, Fund manager ERSTE BOND EM CORPORATE
Fund & Performance
ERSTE BOND EM CORPORATE invests in corporate bonds from emerging countries. The fund invests worldwide and enables investors to participate in the growth opportunities of these emerging markets. Foreign currency risks against the euro are mostly hedged (Note: Please note that an investment in securities entails risks in addition to the opportunities described).
Note: Please note that an investment in securities entails risks in addition to the opportunities described. Past performance is not a reliable indicator of future performance.
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 Péter Varga
How did the fund perform in 2024?
The year started with a sharp correction on the US government bond markets. Strong US economic growth and a renewed rise in US inflation led to a significant reduction in US key-lending rate expectations until after September 2024 and later. The fund generally had a shorter interest rate sensitivity, but also a defensive positioning with regard to the valuation of spreads in a historical context. This was suboptimal in an environment where investors were only looking at absolute returns and would often ignore fundamental developments.
Local investors and investors from other, non-emerging markets asset classes were the drivers here. The local investors preferred to invest in hard currency – i.e. in USD – because local yields in many emerging markets were below US yields.
On the other hand, non-local investors sought out emerging markets corporate bonds in USD, which offered more attractive yields than US corporate bonds.
Over the course of the year, we managed to stabilise the performance relative to the peer group, and the fund continues to be among the top performers over the medium and long term. (Please note: investing in securities involves risks as well as opportunities.)
What was the focus of the fund in 2024?
The fund was generally underweight in the A-BBB rating classes and in Asia, where spreads were often trading at unprecedented lows. We were also more cautiously positioned in issuers with an uncertain future, but which rose sharply in such a “blind” environment (note: a blind environment is one where the focus is on the search for yield without regard to fundamentals). On the other hand, we were overweight in supranational issuers, which had a slightly lower yield and significantly more sensitivity to the US yield curve.
In terms of the economy, we were overweight in solid BB high-yield bonds, which generated good rates of return in the second half of the year with a stable surplus return compared to government bonds. Some attractive new issues, such as the recent Latam Airlines, were prominently weighted in the fund. (Please note: the company mentioned here was selected as an example and does not constitute an investment recommendation.)
What does the fund management team expect for 2025 in terms of global economy and trends?
Trump 2.0 will bring more volatility to the asset class. For active investors like Erste Asset Management, this is a good environment. We expect the markets to initially react nervously to the new policies (tariffs, trade restrictions) of the administration. The emerging market currencies will be the ones to mainly serve as an outlet for the reduction in pressure; in our view, these should tend to depreciate. However, it is not in the interest of the Trump administration to let the global economy crash, so investors should not panic, but rather sensibly weigh up the scenarios and exploit opportunities.
The fundamental figures for emerging markets companies remain very strong, which should continue to provide a good buffer for unfavourable scenarios. The lead manager expects US 10Y yields to range from 3.5% to 4.5%, tending towards the lower end of the range in the event of a more pronounced slowdown. (Please note: investing in securities involves risks as well as opportunities.)
What are your priorities in the fund, based on your expectations?
We are maintaining our overweight in the BB segment for now, as well as our underweight in Asia and in longer maturities in the BBB segment in Latin America. Our supranational issuers such as IBRD and EIB, as well as US Treasuries, act as shock absorbers and, at the same time, a source of liquidity should we wish to take advantage of opportunities.
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