Taiwan Fund : NCRAM CEO+CIO Monthly Update

NCRAM

Monthly Update

November 1, 2023

US High Yield

The US high yield market returned -1.25% in October, as measured by the ICE BofA US High Yield Constrained Index (HUC0), lowering YTD total return to 4.66%. Treasury volatility continued as the market braced for increased supply and a "higher for longer" Fed Funds rate, driven by robust growth data and inflation running slightly hotter than expectations. The 10- year US Treasury yield briefly topped 5% before retreating, ending October up 36 bps at 4.93%. Spiking interest rates impacted high yield spreads, which had remained largely impervious to Treasury volatility in the first nine months of the year. The spread on the HUC0 index increased 39 bps in Oc- tober to 445 bps, but remains 38 bps lower YTD.

Third quarter earnings season has kicked off with relatively solid results in the US thus far. More high yield companies have surprised to the upside than the downside, and forward earnings guidance has skewed modestly positive. Shortly after agreeing to resolve its labor dispute with the United Auto Workers, Ford was upgraded to investment grade by S&P. This will result in roughly $40bn of debt transitioning out of the high yield market. Higher quality issuers outperformed in October, as spread widening triggered sharp CCC underperformance. Defensive sectors like food and utilities topped the broader index, while technology bonds lagged with the NASDAQ, and lower quality healthcare issuers also trailed the market.

Looking forward, NCRAM maintains a constructive outlook for the high yield market. The HUC0 index' 9.5% yield to worst offers an attractive entry point relative to post-GFC history. Early results portend resilient third quarter US high yield earnings. Market technicals remain supportive, with light new issuance this year and more than $115bn of rising stars (including Ford) leaving the high yield investment universe. While the US economy powered through the third quarter (real GDP rose 4.9% and nominal GDP was up a whopping 8.5%), softer indicators like the Beige Book and regional Fed business surveys suggest current growth could be weaker than some hard data implies. NCRAM expects the economy to slow into 2024. Declining growth and cooler inflation should enable the Fed to ease monetary policy as needed, creating a more favorable interest rate environment next year.

European High Yield

The European high yield market, as measured by the ICE BofA European Currency High Yield Constrained Index (HPC0), returned -0.26% in October (EUR, unhedged), resulting in a 6.32% YTD return. Spreads widened about 33 bps during the month. Spread widening was driven by rates, with the yield on the 5-year Bund decreasing 20 bps, and also by a poor start to the European third quarter earnings season, as companies in certain industries have experienced weak demand trends and inventory destocking. This backdrop has resulted in the B and CCC ratings cohorts underperforming in October, while we continue to see solid demand for higher quality paper. Technicals remain strong, and Ford's upgrade to investment grade should further improve demand for BB bonds in the market.

Emerging Markets

Emerging markets (EM) hard currency sovereign bonds, as measured by the JPMorgan Emerging Markets Bond Index Global (EMBIG), declined -1.45% in October, with the drawdown mostly explained by weaker US Treasuries. Investment grade credits underperformed with a -2.0% decline, while high yield credits declined only -0.6%, supported by the bonds' yield cushion. The overall EMBIG spread widened marginally (+4 bps) to 366 bps, while the index yield increased to 8.69% (6.4% in EM investment grade credits and 12.4% in EM high yield).

EM corporate bonds, as measured by the JPMorgan Corporate Emerging Market Bond Index Broad Diversified (CEMBI BD), posted a -1.22% decline in October, with investment grade and high yield names generating similar results. The index spread widened 15 bps on the month to 316 bps, taking the index yield to 8.15%. Year to date, EM USD corporates have delivered a positive total return (+2.12% through October), despite higher US yields.

Multi-Asset Credit

NCRAM's Responsible Multi-Asset Credit Strategy posted a loss in October, underperforming its customized blended reference index. We increased risk and extended duration further in October to take advantage of the sell-off driven by the conflict in Israel and concerns regarding the Fed's higher for longer narrative. Our base case sees a continued corrective phase with a mild recession coming as the effects of aggressive tightening gain momentum. 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.

This document is intended for the use of the person to whom it is delivered. Neither this document nor any part hereof may be reproduced, transmitted or redistributed without the prior written authorization of NCRAM. Further, this document is not to be construed as investment advice, or as an offer to buy or sell any security, or the solicitation of an offer to buy or sell any security. Any reproduction, transmittal or redistribution of its contents may constitute a violation of the U.S. federal securities laws.

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.