Market
backdrop

Market backdrop

2022 was a highly challenging year for asset markets across the board as inflation accelerated rather than falling away as expected. In response, central banks embarked on the most rapid cycle of policy tightening in 40 years. With rates of economic growth slowing at the same time, fears of ‘stagflation’ mounted.

Weighing on growth were supply chain logjams from the pandemic, which were exacerbated by the Russian invasion of Ukraine in March. The jobs market tightened given reduced labour force participation post-COVID, with wages eventually rising as a result of this and then due to inflation/worker wage demands.

At the same time, core inflation remained greatly in excess of central bank targets, while headline rates reached double digits in most economies. That led all developed market central banks outside Japan to raise policy rates into restrictive territory.

In response to the dramatic move up in real rates, fixed income markets posted sharply negative total returns. Credit spreads widened significantly, with higher-risk areas of the market suffering the most. At the sector level, real estate was the weakest area in spread terms across the US dollar, euro and sterling markets.

The profile of market returns and the resilience of the energy sector created a notably unfavourable backdrop for credit and in particular sustainability-themed funds.

Climate Transition Global Credit Fund SICAV

Fund Performance

The fund posted a slight underperformance of its benchmark in 2022. We were active in duration and credit risk positioning given the sharp fluctuations in sentiment towards economic growth, inflation and monetary policy.

We began the year with broadly constructive credit risk positioning as we took a positive view on growth prospects given the post-Covid rebound in activity. While returns were hurt by market turbulence following Russia’s invasion of Ukraine in March, the fund profited from the sharp recovery seen in April. With gains having been made, we pared back risk before raising it once more through the second quarter as attractive new issues came to the market. With sentiment towards growth faltering, we reduced risk once more in June, which was helpful to performance as spreads widened. We became more constructive on risk early in the third quarter and into the fourth quarter, with returns being supported by tactical moves in the wake of the sharp volatility triggered by the fiscal policy crisis in the UK in September.

From a sector perspective, the main contributors were the underweight positions in real estate and long-dated US credit. However, this was offset notably by our overweight exposure to banks, technology and, early in the year, cyclicals. Rating-wise, the overweight BBBs detracted.

At the individual issuer level, the most value was added by long positions in HSBC, Amprion, United Health, GE, Vodafone, Cigna and AT&T. The largest detractors were Viatris, Aptiv, VW, Aliaxis, VolvoCar.

Past performance is not a reliable indicator of future performance – see next slide for full performance information.

As at 30 Sep 2023 – Performance in USD

Performance

	Cumulative (%)					Annualised (%)
	1M	3M	6M	YTD	1Y	3Y	5Y	Since inception
Fund	-1.61	-1.27	-1.27	1.98	5.18	-	-	-5.23
Benchmark	-1.87	-1.63	-1.63	1.46	4.61	-	-	-5.00

Past performance is not a guide to future performance.

Performance basis: Mid to mid, in the share class reference currency, gross of tax payable by the Fund with income reinvested. Net figures are net of ongoing charges and fees. Net and gross performance does not include the effect of any exit or entry charge. The Fund’s performance is compared against the MSCI All Countries World Index (the “Benchmark” or the “Index”).

Calendar year returns

	2018	2019	2020	2021	2022
Fund net	-	-	-	-	-14.65%
Benchmark	-	-	-	-	-14.11%

Share class is used for illustrative and indicative purposes and may not be available in all regions. For further information on other share classes please see the website.

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Changes in positioning

We tactically adjusted exposures in credit risk and duration in response to the ebb and flow of expectations surrounding inflation, growth and rate policy.

We held a preference for financials over corporates. Against an uncertain macroeconomic backdrop, we saw global banks as being well positioned for upcoming pressures, which we felt was not reflected in relative spreads. Revenues were supported by higher rates and volatility. This enabled banks to control earnings allocation – retaining funds to support regulatory capital requirements, building provision against future expected loan losses and funding stakeholder distributions. The increase in the banks positioning was one of the main sector moves over the year. We also reduced exposure to consumer-cyclical bonds as the global economic outlook weakened.

We were reasonably active in the new issue market over the year. We added some ‘yankee’ banks issuance (non-US banks issuing in US dollars) as they offered compelling short-dated carry into the second half of the year. The top-contributing issuers here were Barclays and HSBC. We also added some climate solution providers within various sectors, most notably semi-conductors and electricity transmission. A notable deal on the circular economy thematic was Ashtead, a UK provider of construction machinery rentals that traded with a wider spread than lower-rated United Rentals. We also added Enel to the portfolio. The Italian electricity and gas distribution company is an energy transition leader whose US dollar bonds offered attractive value.

Outlook

With the large overhanging risk of the US debt ceiling having been removed, there are few priceable risks in the corporate bond market in the short term. This increases the likelihood of credit experiencing something of a summer lull.

However, investors will need to tread carefully as risks remain, not least given the fragile performance of the developed economies, with economic data remaining mixed at best. While there has been some improvement in the prospects for the US, the Eurozone is performing disappointingly as the cumulative effect of interest rate rises is starting to be felt. The growth slowdown in China has been felt notably hard in Germany as demand for its manufactured goods as fallen. Given the deceleration, credit fundamentals, which have been hitherto encouragingly resilient, could start to deteriorate meaningfully if the slide towards recession accelerates.

On the positive side, flows from reinvestments and inflows thanks to higher yields are supportive of credit markets, while technicals are helpful too: huge issuance termed out debt in the past few years of ultra-low bond yields, but now supply has dropped off significantly. We should be mindful, however, that the 2025/2026 maturity wall for high-yield bonds poses a risk as companies with weak fundamentals have to refinance at much higher borrowing costs. The market should also find support from the long-awaited turn in monetary policy. Hopes grew that the rate hike by the US Federal Reserve at the end of July would be the last of the current cycle.