Quarterly Review

M&G CREDIT INCOME INVESTMENT TRUST PLC

(the “Company”)

LEI: 549300E9W63X1E5A3N24

Quarterly Review

The Company announces that its quarterly review as at 31 December 2022 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_factsheet_gb_eng.pdf

Market Review

Whilst 2022 will be remembered as one of the worst years on record for risk assets, the final quarter of the year finished on a positive note. Market sentiment improved as signs of weakening inflation in the US and Euro area raised hopes that “peak inflation” may now have been reached, improving the prospect of central banks slowing the pace of rate hikes in 2023. Both the Fed and ECB, and to a lesser extent the Bank of England, maintained a hawkish stance into the year end, insisting that a prolonged period of higher rates would be required to quell inflation, despite market pricing for a “dovish pivot” (the point at which central banks move from interest rate hikes to cuts). In the UK, the transition to a new Prime Minster also helped to calm markets, with 10-year gilt yields falling from a peak of around 4.5% in early October to 3.7% by the end of the year. Sterling credit outperformed, albeit starting from a lower base following the political and market turmoil in the UK at the end of the third quarter. Government bond markets remained volatile and interest rates climbed higher over the period, although investment grade and high yield credit spreads tightened as investor optimism over a “soft landing” grew.

Manager Commentary

The portfolio’s low duration continued to mitigate the negative effect of rising interest rates, with the tightening in credit spreads driving a NAV total return of +3.3% over Q4. The start of the quarter saw sterling investment grade credit sell-off sharply in the aftermath of the UK mini-budget and we took advantage of this period of pronounced volatility to purchase bonds at spreads which were extremely attractive relative to historical levels. Such was the selling pressure on LDI pension funds, that we were able to purchase investment grade, sterling utility paper (Thames Water, Cadent, Yorkshire Water, Eon) at levels that exceeded the Covid-wides of 2020. Our access to the £25m credit facility allowed us to use the episode as an opportunity to add strong, defensive credits into the portfolio, without correspondingly having to raise proceeds from asset sales. As a result, leverage increased over the period from 3.7% to 5.0%. As the quarter progressed, the improving market backdrop and increased investor appetite for risk encouraged issuers to return to market and we participated in a number of financial new issues, which in our opinion priced attractively on a relative value basis. We also executed two new private transactions, committing £1m to the senior tranche of a business providing financing on invoices originated through leading digital freelance/contractor platforms; and investing £1.5m in the mezzanine tranche of a regulated capital trade referencing a predominantly investment grade portfolio of senior global lending facilities. These transactions were partially offset by repayment of some our existing private facilities.

Outlook

The UK is predicted to see the lowest rate of economic growth of all G7 nations in 2023. Higher interest rates, mortgage costs and taxes, alongside a shrinking labour force following the Covid-19 pandemic and Brexit, all look set to constrain growth. In the US, markets and the Federal Reserve remain in disagreement over the path of interest rates in 2023. The central bank is forecasting the base interest rate to be above 5% by the end of 2023 whilst futures pricing indicates a terminal rate of 4.9% by the middle of the year before a series of rate cuts to 4.5% by 2023 year-end. GDP for 2022 Q4 showed that the US economy is continuing to perform more robustly than many had forecast as higher wages from a red hot labour market and excess pandemic savings provided a tailwind to consumer spending habits. This has seen the probability of a recession recede. Similarly, stronger than expected Eurozone GDP for 2022 Q4 has seen economic forecasts for the region improve, although prospects for growth and indeed the wider global outlook look set to be shaped by the severity of winter, and the associated impacts to energy markets. Whether or not countries are pushed into recession, the economic backdrop will undoubtedly remain challenging for companies and consumers alike as central banks prioritise stamping out inflation over stimulating growth. Even a prolonged period of low growth or stagflation will present acute challenges for businesses already grappling with the effects of higher borrowing, labour and energy costs.

Although the road ahead remains uncertain, rising investor optimism that a recession may now be avoided in Europe and the US has fuelled a rally in both corporate and government bonds since the start of 2023. Despite this, given the “higher for longer” message from central banks there is a risk that investors are underestimating both the persistent nature of price pressures and the ultimate peak of terminal rates. There is certainly scope for interest rates to deliver a shock should inflation fail to subside as anticipated, presenting a stress-test for debt markets now carrying record levels of leverage. A sustained period of monetary tightening has the ability to reveal pockets of vulnerability in government bond markets, whilst only recently in the Chinese real estate and European REITS sectors have we have seen how the pressure of refinancing large piles of corporate debt can create ripples in credit markets.

The technical backdrop in fixed income markets is very strong right now, with all-in bond yields comparing favourably versus other asset classes thus attracting capital back into the market. Whilst it is important to acknowledge the potential headwinds, we believe there is now attractive value to be found in credit, with investors being well paid to take risk. Whilst we may see further volatility in the near term, from a long-term perspective we think credit provides compelling risk/return dynamics. Unlike the start of 2022 where risks were not priced in and the compensation investors were receiving was extremely low, today investment grade credit investors are in a much stronger position. The elevated yield provides a good cushion with which to navigate volatile markets, although selectivity and fundamental credit analysis remain key to shaping the portfolio in the year ahead.

Link Company Matters Limited

Company Secretary

3 February 2023

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