M&G CREDIT
INCOME INVESTMENT TRUST PLC
(the “Company”)
LEI:
549300E9W63X1E5A3N24
Quarterly
Review
The Company announces that its
quarterly review as at 31 December 2023 is now available, a summary
of which is provided below. The full quarterly review is available
on the Company’s website at:
https://www.mandg.com/dam/investments/common/gb/en/documents/funds-literature/credit-income-investment-trust/mandg_credit-income-investment-trust_quarterly-review_gb_eng.pdf
Market
Review
It was a positive fourth quarter
for most financial assets as investor sentiment was bolstered by
the easing of inflationary pressures, optimism about forthcoming
rate cuts by central banks and a potential economic ‘soft landing’.
After an initial period of weakness, the year ended with a powerful
two-month rally in bond and equity markets. The trajectory of
economies continued to diverge over the period. With a strong
labour market supporting consumer spending, the US economy grew at
its fastest pace in nearly two years of 4.9% between July and
September. Over the same time period, however, both the eurozone
and UK economies contracted by 0.1%, fuelling concerns over
recession as consumer spending and manufacturing activity continue
to stagnate.
Manager
Commentary
Pleasingly the Company delivered
another quarter of strongly positive performance. The Company’s NAV
total return in Q3 was +3.40% which outperformed the benchmark and
concluded a strong year as the portfolio delivered an NAV total
return of 10.42% across 2023. Performance in the final quarter of
the year was driven by capital gains as the portfolio benefited
from the rally in credit spreads, fuelled by optimism for rate cut
expectations in 2024.
The tenacity of the rally and the
appetite for risk into the close of the year saw bond spreads
tighten notably during the period, which benefited asset
valuations. Consequently, this also created a more challenging
environment in which to add assets to the portfolio which in our
opinion would provide attractive risk-adjusted returns. One area of
the corporate bond market that did lag the wider rally was
Utilities, particularly the water sector where idiosyncratic sector
risks have seen credit spreads remain wider. As such, we
participated in the South West Water new issue which printed with
what we felt was a generous concession to its secondary curve and
compared well to peers. Into the market strength we also took the
opportunity to sell holdings in issuers that had tightened too far
relative to their credit fundamentals (Voyage Care, Hiscox,
Asda).
During times such as these, when
credit spreads compress, we tend to favour going up in quality
rather than chasing yield. Looking across the piece for which areas
of the market we felt offered the most attractive relative value
led us to focus activity in both public and private ABS new issues.
Investing in the higher rated tranches of securitised structures
can provide additional protection in more challenging credit
environments whilst also offering a significant spread pick-up
versus equivalently rated corporate bonds. We purchased £0.4m of
the mezzanine tranche in the latest issuance from UK credit card
issuer Newday, NDFT 2023-1X, which is A-rated by Fitch and returns
SONIA+370bps. We also purchased £0.4m in CASTE 2023-2 C, the
mezzanine tranche in a UK RMBS securitisation which is rated A by
S&P and returns SONIA+320bps.
In the private market we deployed
£0.8m into a regulatory capital transaction from a leading UK bank,
with the BBB-rated note backed by a diversified portfolio of senior
secured UK SME loans. We also invested £1.5m in the refinancing of
an existing private deal, although one that was originally funded
prior to the Trust’s inception. The borrower is an outdoor media
infrastructure owner, investing and managing a 5,000+ billboard
portfolio in the UK, Netherlands, Spain, Ireland and Germany with
space leased directly to media operators who in turn lease to
advertisers. The floating rate, 5-year loan is rated BBB- and
returns the equivalent of SONIA+400bps over its term.
Outlook
Financial markets have been buoyed
by rate cut and ’soft landing’ expectations, although central bank
officials have been keen to reaffirm that market pricing for the
path of interest rates runs strongly counter to their base case.
The recent rally in bonds and equities has been driven by the
expectation that financial conditions will loosen notably as the
year progresses, and current asset valuations are predicated upon
this assumption. Though optimism is warranted given the progress
made in reducing inflation, it does feel like the market has got
ahead of itself both in the magnitude and timing of rate cuts being
forecast in 2024. Sticky service prices, high wage growth and
rising rental costs are hurdles that suggest inflation will prove
particularly stubborn over the ‘last mile’. In our opinion,
aggressive cutting of interest rates doesn’t appear the most likely
outcome given the hawkish bias of central banks thus far, with
lessons of the past on resurgent inflation likely to factor into
decision making. It should also be noted that the Fed look best
placed to engineer a ‘soft landing’, whilst the Bank of England and
ECB face bumpier rides given the more difficult economic backdrop
in Europe. That said, whether market implied cuts for sterling
interest rates do materialise, or we see the slower rate of cuts
signalled by Bank of England officials, both scenarios would see
the Company’s dividend remain elevated, in the range of 8-9% over
the year (based on a dividend return of SONIA+4%).
We enter the new year riding a wave
of investor exuberance, though in our view it feels complacent to
assume smooth sailing from this point onwards. Monetary history has
shown that the full effects of interest rate rises typically
operate with an 18 month lag, which would suggest the shockwaves
from sharp hiking cycles are yet to fully reverberate through the
economy. Therefore, it still remains to be seen whether the
expected ‘soft landing’ does in fact turn into a ‘hard landing’.
Both scenarios will ultimately result in the rate cuts much desired
by markets, however if the driver of cuts is to prevent a recession
rather than having successfully steered inflation back to target,
the economic implications will be far less positive. Consequently,
we prefer to remain defensively positioned at current credit spread
levels, favouring a move up in quality, rather than reaching for
yield.
A more challenging and uncertain
economic outlook highlights the requirement for fundamental credit
analysis as the backbone to fixed income investing in 2024. With
maturity walls really coming in to focus this year and corporate
issuers starting to feel the bite from the lagged effect of higher
interest rates, balance sheet and structural analysis will be key
to determining issuers ability to service and refinance debt as
well as assessing profitability and revenue generating
capabilities.
Both domestic and foreign politics
are poised to play a more central role in financial markets in the
next twelve months. Geopolitical tensions are as heightened as they
have been for decades as the Russia-Ukraine war looks set to move
into its third year, whilst the conflict between Israel and Hamas
still threatens to engulf the Middle East. Recent attacks by Houthi
rebels on commercial shipping in the Red Sea have prompted UK and
US armed response, although at present markets appear to have
largely shrugged off the threat of escalation. Should tensions
between Palestinian backers and Israel’s Western allies spill over,
the threat to global trade and oil prices could significantly
impact an already precariously positioned global economy.
Additionally, a lagged inflationary upside effect from increased
shipping costs could factor into ECB or Bank of England rate
cutting decisions in the latter part of the year. Domestic politics
will also be in focus with elections in both the UK and US expected
in the second half of 2024. Recent events have shown how sensitive
the UK market can be to surprises in fiscal policy, and as the
election approaches both parties may look to unveil spending plans
in the hope of attracting voters which could unnerve bond
markets.
Some termed 2023 as the “Year of
the Bond” and as we move into 2024, many of the favourable
tailwinds in fixed income markets look set to continue. The
technical backdrop remains strong, with all-in bond yields still
screening favourably to other asset classes, which should keep
credit spreads well anchored. Our focus in the first part of 2024
will be to continue to identify the best available risk-adjusted
opportunities in order to maintain the strong income generating
properties of the portfolio, whilst remaining disciplined on price,
and being both nimble and flexible in investing across both public
and private markets.
Link Company
Matters Limited
Company
Secretary
26 January 2024
- ENDS -
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