September 2020 Commentary

Policymakers hoped that the Covid-19 pandemic would recede during the hotter summer months, instigating to gradually lift restrictions at the start of the summer season in the northern hemisphere. This has not materialized, and the renewed government-imposed restrictions in some countries, including France and Britain, in September, weighed on sentiment. Indeed the factors that influenced markets throughout the month were the virus, economic data, and the US election.

So far, better testing and tracing capacity has allowed European policymakers to treat this second wave with targeted measures, including travel restrictions or the requirement to wear a facemask in public, instead of national lockdowns. This was done in an effort to better balance public health policies with economic policies. Policy makers are relying on the arrival of a viable vaccine in the first half of 2021.

As a result of the mixed information affecting key market catalysts, markets were somewhat volatile in September, with asset selloffs triggered by poor data, followed by a recovery intra-month on vaccine hopes. Appetite for new issues coming to market remained strong, with demand exceeding supply and creating a strong technical bid.

Expectedly, data is becoming a very sensitive element for market participants as it depicts the strength of the recovery, particularly in light of the announcements of further restrictions throughout the month. The latest data has been mixed highlighting the challenging situation world economies are facing.

Looking at economic data points, Europe continued to show tentative signs of recovery despite a second wave, as economic activity continued to build. Looking at Europe’s largest economy, Germany, PMIs indicated an expansion during the month of September, with Manufacturing PMI, increasing to 56.4, compared to a consensus estimate of 56.6, and a previousreading of 52.2. Services PMI also registered an expansion, coming in at 50.6 compared to expectations of 49.1, however lower than August’s reading of 52.5. Meanwhile, the Euro Area’s Manufacturing PMI indicated an expansion to 53.7, in line with expectations, while services PMI retreated to 48 from a previous reading of 50.5.

Furthermore, both lagging and leading indicators showed some weakness with unemployment within the Eurozone area inching upwards to 8.1% from 8.0%. Moreover, consumer confidence remained weak, with readings coming in at -13.9. Collectively, despite some positive signs, indicators are suggesting that we are still at the very beginning of a fragile economic recovery.

Looking at sovereign yields on the 10-year German Bund, Europe’s mostly sought benchmark closed tighter than the previous month at -0.521 compared to -0.398 at the end of last month, with most of the tightening occurring during the last week of September. The yield curve experienced a parallel shift downwards, in line with the increased volatility in the marketplace during September. These moves were also experienced in European peripheral sovereigns.

Within the HY asset space, risk assets experienced a sharp sell-off during the second half of the month, with only a partial recovery by the end of the month to close of September with a negative 0.70 percent return. The said moves were correlated to the sentiment surrounding equity markets, which were more pronounced as the challenging situation takes hold.

The CC Euro High Income fund fell by 0.4 percent, less than the general market with an outperformance of circa 30bps. On a year-to-date basis, the fund is slightly underperforming on a net basis due to the lower beta of the portfolio and the subsequent market recovery; albeit the volatility of the fund has been markedly lower than average. Throughout the month, the Manager continued to adjust the portfolio into attractive undervalued credit stories, primarily within the AT1 space. Moving forward the Managers believe that credit markets will continue to be aided by the support of primarily monetary politicians, creating a positive technical environment. In terms of bond picking, the Managers will continue to monitor the current environment and take opportunities in attractive credit stories.