Investors, including ourselves, faced a challenging quarter. Most financial assets, including credit, have endured declines since Q1.

Heading into the 5th month of the war between Russia and Ukraine, the extended disruption to the global energy and food market has caused upward pressure on global prices. US headline inflation rose, reaching 9.1% in June, and the Fed guided the expected benchmark interest rates to 3.4%  by year-end. Officials also significantly cut their economic growth outlook for 2022 to 1.7% in GDP, from 2.8% in March. Europe, similarly, experienced a record high 8.6% annual inflation rate in June, and the ECB will begin to raise interest rates in July for the first time in 11 years.

The rising global interest rate environment had a negative price impact on existing bonds, especially those with longer duration. The increase in the price of goods has also dampened consumer confidence and purchasing power, slowing down economic activity. Investors are troubled, both with runaway inflation as well as a sharply decelerating economy.

In China, key cities such as Beijing and Shanghai were still on a covid-lockdown up until the end of June. At the same time, more and more real estate developers are reportedly facing liquidity challenges and defaulting on their debt obligations. The contagion spread to include large corporates such as Country Garden, Shimao Group as well as Fosun. The predicament of the housing market is still an area of concern for the Chinese economy, even though the contracted sales data shows stabilization from May onwards.

However, inflation was better contained in China, giving the PBOC room to stave off contagion effects. The PBOC announced a 25bps cut in the reserve requirement ratio, and a cut in the 5-year Loan Primate Rate by 15bps to 4.45% to support the property market.

The global economy will continue to be vulnerable as we head into the second half of the year, and international corporate credit performance will remain uneven across regions and sectors, with a likelihood of bias to the downside. We will continue to exercise caution to protect investors’ assets should the bond market continue to fall.

As of the end of June, the fund holds almost 40% cash in the portfolio. The credit space is getting becoming increasingly more attractive, and we are in a good position to redeploy the cash reserves.

While we believe that a lot of the bad news has been priced in today, prices will remain volatile in the months ahead which will allow us to deploy the cash advantageously.

Jun 2022