June 2020 Commentary
In May, the Central Bank of Malta’s Business Conditions Index fell slightly when compared with the previous month, suggesting that economic conditions remain significantly below their long-term average. By contrast, the Economic Sentiment Indicator (ESI) rose when compared with the previous month as confidence improved across almost all sub-components, particularly in the construction sector. However, sentiment among retailers fell. Despite the improvement in sentiment compared to April, the ESI remains well below the historical average and still suggests low confidence levels.
The latest data available, being as at the month of April, indicates that the volume of retail trade contracted significantly in annual terms. Similarly, growth in industrial production turned negative. The unemployment rate rose as the number of registered unemployed increased further. However, the unemployment rate remains low from a historical perspective. Consumer price inflation eased in April. The annual inflation rate based on the Harmonised Index of Consumer Prices fell to 1.1%, while inflation based on the Retail Price Index edged down to 0.8%.
Developments in public finance include a deficit on the cash-based Consolidated Fund which widened significantly compared with a year earlier, reflecting a significant rise in government expenditure and a large drop in revenue in view of COVID-19.
Given the current scenario, undoubtedly public finances will be materially impacted primarily also when considering the recent accommodative measures to combat covid-19, in addition to the economic strains primarily from the tourism sector which accounts to circa 30 percent of Malta’s GDP. However, the Manager still believes that the economy should still outperform its European peers as recovery scenarios take place, especially given the low level of infections currently present.
The CC Malta Government bond fund continued to outperform its peers following the Managers decision to hold a comparatively lower duration. Indeed on a year-to-date basis, the fund continues to outperform the Malta Government Bond Total Return Index by circa 70 bps. The Manager believes that QE remains supportive for sovereign bonds, the long end of the curve remains very sensitive to forward looking inflation expectations, despite the fact that covid-19 are containing inflationary moves. Going forward the Manager will deploy the current cash levels into the medium end of the curve, while taking active positions in foreign sovereign exposures.
