Interest rates continued to rise in March, prompting concern from many fixed income investors. Our securities once again demonstrated their resilience to rising rates. Our exposure to fixed-to-floaters and floaters ensure that the fund has low sensitivity to interest rates. Moreover, subordinated debt, especially subordinated debt issued by the financial sector, tends to benefit from a rising rate environment. Despite the moves, we believe central banks will remain accommodative. On the Covid-19 front, news in Europe has been negative overall with third waves of Covid-19 infections occurring. Some countries have reverted to harsher control measures in response. However, we believe such measures should be temporary and only slightly delay the reopening of the economies, as populations become vaccinated. Therefore, we do not believe this will have any impact on our holding companies. We have come to the end of Q4 earnings, and overall financials have been resilient above expectations. We have seen a gradual path to normalisation, with less provisioning than the previous quarters for expected credit losses. Additionally, capital strength 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.We believe financials should be able to remain resilient even in a prolonged Covid-19 scenario, especially as fiscal policy is expected to remain accommodative. Moreover, due to our exposure to fixed-to-floaters and floaters, we believe the fund is well-positioned for a period of rising rates. At the same time, we are capturing spreads of circa 360 bps within the subordinated debt of financials. Unlike in other parts of the bond market where spreads are near historical lows, valuations on subordinated debt of financials remain attractive at 100 bps wider than pre-Covid-19.
