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
“One of the main factors behind the robust performance of investment-grade corporate bonds was the continuous improvement in fundamentals, which led to an upgrade in company ratings.”
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: 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 Michiel van der Werf
What sort of conclusion do you draw from 2024 on the capital markets?
The good performance of investment-grade corporate bonds ensured that the fund was up by 4.2% in 2024, despite the rise in interest rates for government bonds since the beginning of the year. (Please note: an investment in securities involves risks as well as opportunities.)
2024 was a good year for credit as spreads comfortably navigated all the macroeconomic challenges, supported by strong fundamentals and an almost insatiable appetite for the asset class. Spreads were flat for most of the year, except for June and August when we saw a moderate widening.
Government bond yields, on the other hand, were very volatile, with the 10Y German government bond yield moving in a range of almost 0.7 percentage points and the 10Y US Treasury yield fluctuating in a range of 1.1 percentage points.
What were the reasons for this development in 2024?
One of the main factors behind the robust performance of investment-grade corporate bonds was the continuous improvement in fundamentals, which led to an upgrade in company ratings.
However, we also saw some distortions in certain market segments. In February 2024 in particular, banks specialising in commercial real estate lending came under pressure. That being said, the overall picture for bank bonds was quite positive.
How did the fund management team react to it?
We were overweight in the banking and insurance sector, and we have maintained this overweight. Banks continue to benefit from higher interest rate margins and high equity ratios.
Credit spreads are now at very low levels, and we believe that the potential for narrowing is increasingly limited, whereas the potential for widening is significantly greater. However, this was the case for much of 2024, and it did not reduce demand for this asset class. Even the high new issue volumes in the second half of August and in September (EUR 127bn in six weeks) were not enough to stop the ongoing spread rally.
In contrast to the now narrow spreads, the absolute yield level remains attractive compared to the past decade. Sectors with higher volatility (e.g. the automotive sector), by comparison, offer even higher yields. If the ECB cuts interest rates further in the coming quarters, the yields that many corporate bonds currently offer are likely to remain very attractive over the entire life of the bonds. We therefore continue to regard ERSTE BOND EURO CORPORATE as an attractive investment opportunity, with a yield of around 3.35% (as of 31 December 2024) and a very good credit rating. (Please note: investing in securities involves risks as well as opportunities.)
Most investment-grade companies remain solid. Although sales are falling slightly in some cases and profit margins remain under pressure, many are able to pass on price increases. In fact, credit ratings are constantly improving and are indeed close to the best level ever recorded in Europe.
What is your positioning for 2025?
No changes have been made to the fund strategy to date. This involves ongoing analysis of inefficiencies (e.g. creditor position in financial securities), market disruptions and continuous monitoring of the portfolio in terms of return potential and risk level, as well as participation in attractive new issues. Default risk for the entire portfolio is further reduced by a broad diversification in the selected corporate bonds.
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