M&G CREDIT
INCOME INVESTMENT TRUST PLC
(the “Company”)
LEI:
549300E9W63X1E5A3N24
Quarterly
Review
The Company announces that its
quarterly review as at 30 September 2024
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
The global economy began to
stabilise over the third quarter, with easing inflation prompting
major central banks to cut interest rates from their previous
highs. In the US, headline inflation reached the lowest level in
over three years as the consumer price index rose 2.5% year-on-year
in August, down from 2.9% in July. The UK’s 12-month headline
inflation rate held steady at 2.2% for both July and August.
Headline inflation in the eurozone continued its downward trend,
falling from 2.6% in July to 2.2% in August. With inflationary
pressures continuing to subside, the strength of the labour market
proceeded to take centre stage. At their meeting in July, Fed
officials acknowledged that the dual mandate of reducing inflation
and maintaining stable employment was now becoming more balanced in
focus, admitting that the labour market may be nearing a turning
point. Indeed, an unexpectedly weak July US jobs report contributed
to a “blink and you missed it” episode of market volatility at the
start of August, fueled by decelerating macroeconomic indicators,
shifting global monetary policy expectations and sharp movements in
the Japanese yen. September saw the Fed finally deliver it’s much
anticipated first rate cut of this economic cycle, opting for a
bumper 0.5% reduction in their policy rate which went against
market consensus for a more constrained 0.25% cut. The ECB then
followed by delivering a much more widely anticipated 0.25%
interest rate cut of its own, which preceded the release of weak
Eurozone PMI data indicating economic contraction across the bloc
which fueled wider growth concerns. The quarter closed with the
Peoples Bank of China (PBOC) slashing a host of Chinese market
lending rates, triggering a bounce in domestic indices with a
particularly positive knock on effect to European stocks with
exposure to the region.
Manager
Commentary
Having closely tracked its SONIA+4%
benchmark over the first half of the year, the Company’s
performance in the third quarter was notably hindered by an
incident of credit stress occurring in one of the portfolio’s
private holdings. This led to a mark down equivalent to 0.6% of NAV
which resulted in a quarterly NAV return of 1.61% compared to 2.30%
returned by the benchmark. This also contributed to
underperformance versus comparative investment grade fixed income
indices such as the ICE BofA Sterling Corporate and Collateralised
Index (+2.34%), the ICE BofA 1-3 Year BBB Sterling Corporate Index
(+2.10%), and the ICE BofA European Currency Non-Financial High
Yield 2% Constrained Index (+3.48%).
In public bond markets, despite
some weakness in line with the wider macro tone during the
pronounced (but short lived) bout of volatility in early August,
sterling credit spreads finished the period roughly unchanged.
Within August’s short episode was in fact a rather compelling
endorsement of credit markets, as the small move wider in spreads
remained relatively contained despite wider market tumult. The
technical in public bond markets remains very strong, with issuance
levels lagging the pace of inflow and reinvestment which is keeping
credit spreads well anchored. Whilst all-in yields for corporate
bonds are attractive given the elevated risk-free component, credit
spreads remain at historically tight levels and as such we maintain
a bias towards reducing risk. We sold down our exposure to Thames
Water in early September following further internal analysis upon
which we concluded that a resolution in which our bonds wouldn’t
take a significant haircut was now looking increasingly remote.
Subsequently, it was reported that Thames would face a liquidity
crunch in December (previously thought to have enough cash to
continue operating until May 2025) and rating agencies downgraded
our previously held bonds to CCC+ from BB. We also sold down our
exposure to UK REIT Hammerson Plc on relative value grounds rather
than credit concerns. The bond had performed very well for us since
being purchased at much wider levels in mid-2022, tightening in to
offer a spread over cash which in our opinion wasn’t commensurate
with BBB+ rated risk. In the portfolio, REIT names and credits with
Real Estate exposure performed well during the period on the deeper
and swifter rate cuts narrative, along with higher beta
financials.
In the private market, we committed
a combined £4.8m across four new assets: Two investment grade Real
Estate transactions, one for a loan secured against four prime
retail warehouses in key Southeast and Midlands locations (£1.3m),
and the other, the senior tranche in a mortgage secured whole loan
providing financing against the development of two land plots in
Woodford and Enfield which will become logistics warehouses
(£1.5m). We also participated in two Direct Lending deals, the
first a global manufacturer of waste recycling processes and
equipment (£1m), and the second, a highly regarded small molecule
drug manufacturer (£1m). During the quarter, we did an in-specie
transfer of our holding in the M&G Lion Credit Opportunity Fund
IV to the newly launched M&G Investment Grade ABS Fund, which
follows the same strategy but is daily rather than monthly dealing
and thus offers improved liquidity which is preferable in
maintaining flexibility in the portfolio.
Outlook
At a global level, progress on
inflation remains positive and an economic soft landing continues
to be the consensus base case. However, this fabled “Goldilocks”
scenario is threatened by geopolitical conflicts and fiscal
uncertainty, whilst tepid growth (particularly in Europe) and
rising trade barriers are also headwinds we remain cognisant of. As
we enter the final quarter of the year, the rate setting policies
of global central banks are poised to remain the dominant driver of
financial markets.
Geopolitical risk remains elevated,
as it has been persistently throughout the year. In the US,
although we will see a newly elected President come November, the
market’s main sensitivity is to the government's wide deficit and
elevated debt levels which are forecast to increase regardless of
whether Democratic nominee Kamala Harris or Republican nominee
Donald Trump take the Oval Office. A second Trump term would also
threaten to heighten political risks arising from a US-China trade
war, as well as complicating the protracted conflict between Russia
and Ukraine by ending US involvement and cutting aid. In the Middle
East, tensions have ratcheted up recently following a series of
attacks that have drawn Iran into direct confrontation with Israel.
At a macro level, the potential effects on oil supply and
production in the region have increased concerns around inflation
and seen the number of rate cuts that were expected a few months
ago dialled back.
We remain positive on the outlook
for investment grade credit, and given its yield benefits and
defensive characteristics, it is, in our opinion, an attractive
asset class to be invested in at this point in the economic cycle.
We also remain positive on the outlook for the wider private credit
market. Although credit spreads in public bond markets remain at
historically tight levels, our flexibility in being able to invest
across a diverse range of alternative asset classes and private
credit can help continue to deliver a particularly attractive
return premium to public markets. After a busy year for private
market activity, we are still seeing a strong pipeline of
investment opportunities as we approach the year end, a number of
which are moving through to late stage and which we hope to
transact on in the coming months.
Link Company
Matters Limited
Company
Secretary
31 October 2024
- ENDS -
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the content of the Update referred to above, is neither
incorporated into nor forms part of the above
announcement.
For further information in relation
to the Company please visit:
https://www.mandg.com/investments/private-investor/en-gb/investing-with-mandg/investment-options/mandg-credit-income-investment-trust
