MARKET ENVIRONMENT

Interest rates rose significantly during Q1 2021. This was not a major concern for our fund, as it is positioned to have low sensitivity to interest rates, notably through the exposure to fixed-to-floaters and floating-rate notes. Moreover, subordinated debt, especially subordinated debt issued by the financial sector, tends to benefit from a rising rate environment. This is because the profitability of financials tends to increase as interest rates rise, and this should lead to tighter spreads for our securities. As a result, our fund once again demonstrated that it could perform well during periods of rising interest rates. We also believe that despite the moves we have seen in interest rates, central banks will continue to maintain accommodative monetary policy. On the Covid-19 front, we have seen rising case numbers in several European countries, and some of those countries have taken stricter measures to counter this so-called third wave. We believe these measures are likely to be temporary and we should get closer to normalisation as populations become vaccinated. We do not believe the delays will have any significant impact on the securities we own. European financials demonstrated their resilience once again via Q4 2020 earnings. We have seen a gradual path to normalisation, with less provisioning than in previous quarters for expected credit losses. Capital remains a bright spot, with the average common equity tier one (CET1) ratio increasing to 14.2% from 13.4% pre-Covid-19. As an example, HSBC has increased its excess capital to USD 43 billion, up from USD 29 billion pre-Covid-19.

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