Taiwan Fund : NCRAM CEO+CIO Monthly Update

NCRAM

Monthly Update

October 2, 2023

US High Yield

The US high yield market returned -1.18% in September, bringing the YTD total return to 5.98%, as measured by the ICE BofA US High Yield Constrained Index (HUC0). The primary factor this month was the sell-off in the US Treasury market, as the yield on the 10-year US Treasury increased 46 bps to 4.57%, and the yield on the 5-year increased 36 bps to 4.61%. The Treasury market has adopted a view that the US economy can withstand higher rates, and therefore the Fed will keep rates "higher for longer." Growth has remained stable so far, especially employment trends. Further- more, the Fed has endorsed a sanguine outlook for growth, as the median forecast for 2024 real GDP growth increased from 1.1% to 1.5% at the Sep- tember FOMC meeting. One of the reasons that growth has surprised to the upside is the fiscal deficit of roughly 5-6% of GDP, a high level during a period of low unemployment, and Treasury supply has also been cited as a cause of Treasury weakness recently. Oil prices also moved higher this month due to OPEC+ supply constraints, and WTI crude increased from roughly $84 to $91. While this level of prices probably will not slow the economy much, it presents a marginal negative in the outlook for inflation. At the FOMC meeting, the median Fed forecast for 2024 core PCE inflation was unchanged at 2.6%, a level which implies progress on disinflation, but still a need to bring inflation down further, thereby contributing to the "higher for longer" backdrop.

As growth is not a key concern, high yield spreads widened only 18 bps on the month, and US high yield ended the third quarter with a yield of 8.96% and spread of 406. Among ratings segments, CCCs outperformed thanks to higher yield and lower duration, while BBs lagged. In the market overall, the Automotive, Cable & Satellite, and Telecom sector indices fell the least, while the Building Materials, Healthcare, and Consumer sectors fell the most, due primarily to issuer specific news. Looking forward, higher long and short term interest rates, higher oil prices, and the stronger US dollar all act to tighten financial conditions, at the same time that the fiscal deficit continues to stimulate the economy. Our view is that the "higher for longer" thesis has been over emphasized, and most likely rates will be lower in the long run. In that case, the roughly 9% yield for US high yield could prove to be a good entry point for longer term investors.

European High Yield

The European high yield market returned 0.41% in September, leading to a YTD return of 6.35%, as measured by the ICE BofA European Currency High Yield Constrained Index (HPC0) in local currency terms. During the month, 10-year Bund yields widened considerably and ended the third quarter at 2.93% on "higher for longer" rate fears, but with Eurozone inflation easing from 5.3% year-over-year in August to 4.3% in September, the market is hopeful that the ECB will not hike policy rates further at its October 26th meeting. While European economic data appears to be weakening, the market continues to be optimistic that a soft landing can be achieved. Under this backdrop, B and CCC-rated credits outperformed. Spreads ended the month at 459 bps, slightly tighter on the month. Issuance activity has picked up, but mainly involving refinancing transactions, as there are still relatively few new issuers coming to the market, so technicals continue to be strong.

Emerging Markets

The US Treasury sell-off impacted emerging market (EM) hard currency debt markets, especially the longer duration market for EM sovereigns. EM hard currency sovereign bonds, as measured by the JPMorgan Emerging Markets Bond Index Global (EMBIG) declined -2.81% in September, with investment grade credits lagging the most due to their higher sensitivity to interest rates. Meanwhile, EM corporate bonds, as measured by the JPMorgan Corporate Emerging Market Bond Index Broad Diversified (CEMBIBD) posted a more moderate -0.78% decline thanks to its lower duration relative to EM sovereign bonds as well as moderate spread tightening. With the move in US Treasury yields in September, average all-in yields in the asset class increased to 8.34% for EM sovereigns and 7.75% for EM corporates.

Regarding business updates, the Nomura Funds Ireland Emerging Markets Corporate Bond Fund, which NCRAM sub-advises, was launched on September 12th.

Multi-Asset Credit

NCRAM's Responsible Multi-Asset Credit Strategy posted a loss in September, underperforming its customized blended reference index. Our overweight to investment grade and long duration posture were performance detractors, whereas security selection and our HY CDX hedge were positive contributors. We tactically increased risk and extended duration in late September to take advantage of the sell-off driven by concerns of a hawkish Fed, US government shutdown, and UAW strike. Our base case is another corrective phase with a mild recession in late 2023 as the effects of aggressive tightening gain momentum, and accordingly we continue to overweight investment grade risk and duration in this strategy.

David Crall, CFA

NCRAM CEO and CIO

Disclosures

This document is prepared by Nomura Corporate Research and Asset Management Inc. (NCRAM) and is for informational purposes only. All information contained in this document is proprietary and confidential to NCRAM. All opinions and estimates included herein constitute NCRAM's judgment, unless stated otherwise, as of this date and are subject to change without notice. There can be no assurance nor is there any guarantee, implied or otherwise, that opinions related to forecasts will be met. Certain information contained herein is obtained from various secondary sources that are believed to be reliable, however, NCRAM does not guarantee its accuracy and such information be incomplete or condensed. Historical investment performance is no guarantee of future results. There is a risk of loss. Strategy performance references are based on gross of fees performance.

Certain information contained in this document contains forward-looking statements including future-oriented financial information and financial forecasts under applicable securities laws (collectively referred to herein as forward-looking statements). Except for statements of historical fact, information contained herein constitutes forward-looking statements. Although NCRAM believes that the expectations reflected in such forward-looking statements are based on reasonable assumptions, it can give no assurance that forward-looking statements will prove to be accurate. These statements are not guarantees of future performance and undue reliance should not be placed on them. Forward-looking information is subject to certain risks, trends, and uncertainties that could cause actual performance and financial results in future periods to differ materially from those projected. NCRAM undertakes no obligation to update forward-looking statements if circumstances or NCRAM's estimates or opinions should change.

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Performance data is calculated by NCRAM based upon market prices obtained from market dealers and pricing services or, in their absence, an estimate of market value based on NCRAM's pricing and valuation policy. All performance is historical and assumes reinvestment of dividends, interest and capital gains. Performance data stated herein may vary from pricing determined by an advisory client or by a third party on behalf of the advisory client. Performance data set forth herein is provided for the purpose of facilitating analysis of account assets managed by NCRAM, and should not be used for the purpose of reporting or advertising performance of specific account portfolios to account beneficiaries or to third parties.

An investment in high yield instruments involves special considerations and certain risks, including risk of default and price vola- tility, and such securities are regarded as being predominantly speculative as to the issuer's ability to make payments of principal and interest.

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The views and estimates expressed in this material represent the opinions of NCRAM and are subject to change without notice and are not intended as a forecast or guarantee of future results. Such opinions are statements of financial market trends based on current market conditions. The views and strategies described may not be suitable for all investors. This material has been prepared for informational purposes only, and is not intended to provided, and should not be relied upon as legal or tax advice.