Emerging Markets Corporate Bond Fund

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Overview

Manager's Outlook

Exogenous risks remain a cause for caution. Additionally, idiosyncratic risks in a few markets combined with a global central bank rate hiking cycle have led to a challenging investment climate. However, recent volatility has moved absolute valuations to below historical averages. Corporate fundamentals and credit metrics are generally healthy, but likely at peak levels as supply shortages and rising input prices are pressuring margins in places.

We expect overall market sentiment to be challenged in the near term. Global growth has continued to be disappointing; however, there is a degree of optimism that China's recovery will gain more traction in the coming months. Despite the weak economic backdrop, some corporates appear to be managing the macro issues well from an operational perspective and balance sheets have benefited from a period of deleveraging. The absence of near-term maturities should also keep default rates contained over the near term. We will be actively monitoring the 2Q2022 earnings season to further assess how companies are managing the challenging climate.

Growth recoveries are slowing in some markets as inflation pressures build and the monetary policy trajectory is now less accommodative for growth. However, EM debt continues to offer a substantial yield premium and broadly sound fundamentals, making the asset class compelling on a risk-adjusted basis relative to other credit sectors.

The fund maintained above-average exposure to investment-grade markets such as Mexico and Chile. The portfolio has reduced exposure to the more mainstream high yield markets of Turkey and South Africa due to deteriorating credit profiles and institutional quality and are underweight fragile frontier markets such as Nigeria and Zambia.

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As always, our process is centered around bottom-up, fundamental research and effective security selection. This approach will become increasingly important as the market environment becomes less beta-driven and fundamentals come back to the fore.

Strategy

Fund Summary

We take a highly active approach that is largely benchmark-agnostic. We apply intensive, local bottom-up analysis to identify pricing inefficiencies and avoid risks others might not be able to spot. We aim to identify credit rating upgrade candidates, offering an attractive spread relative to similarly rated peers. The promotion of environmental and/or social characteristics is achieved through the fund's commitment to maintain at least 10% of the value of its portfolio invested in Sustainable Investments, as defined by the SFDR. Additionally, we apply a proprietary responsible screen (exclusion list). The manager is not constrained by the fund’s benchmark, which is used for performance comparison purposes only.

OUR VIEWS ON EMERGING MARKETS

30-Jun-2022 - Samy Muaddi, Portfolio Manager,

Overweight Domestically Oriented Sectors

We maintained the technology, media, and telecommunications sector as our largest overweight. This generally higher-quality sector can be defensive during bouts of market volatility and remained supported by ongoing demand for telecommunication services.

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Exposure to the consumer sector increased as consumer demand returned amid fewer pandemic lockdowns. We added to Brazilian protein producer Marfrig on improved relative value following recent weakness. We initiated a position in China Mengniu Dairy as growth in China has been resilient.

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We increased holdings in the high-quality utility sector, adding to issuers in higher-quality countries. We initiated positions in Israel Electric and Adani Electricity and added to Minejesa. We also participated in a new issue from Transmantaro.

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The transportation sector remained an overweight, and we added to these holdings. We trimmed our position in Georgian Railway amid weakness in emerging Europe. We added to holdings in high-quality issuers by initiating a position in Airport Authority Hong Kong.

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Underweight Lower-Yielding and Less-Attractive Risk-Adjusted Relative Value

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The financials sector remains the largest underweight. We eliminated holdings in Banco Santander Chile amid weakness in the Chilean peso. We also trimmed Corporacion Financiera de Desarrollo, the Peruvian state-owned development bank, amid political uncertainty.

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We trimmed holdings in the oil and gas sector. We reduced positions in higher-yielding Medco Oak Tree and Geopark, while adding to higher-quality GC Treasury Centre and China Oil and Gas.

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We reduced our metals and mining allocation, moving further underweight. We trimmed positions in Abja, Minsur, and Industrias Penoles. Reduced global growth expectations could diminish demand for commodities.

Credit Quality Considerations

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From a quality perspective, we find the most value in BBB and BB credits, albeit on a selective basis. These segments generally offer opportunities to identify companies with improving fundamentals that are rating upgrade candidates or provide a stable and attractive risk-adjusted yield.

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We modestly decreased risk in the portfolio over the quarter. We added to BBB rated Chinese auto dealer Zhongsheng Group on analyst conviction upgrade due to the company's strong fundamentals and resilient profitability. We also added to BB rated utility Mong Duong. We continue to generally avoid distressed issuers in the CCC and below segment given their increased volatility, history of poor risk-adjusted returns and elevated default risk in the current environment.

Team

Samy Muaddi,
Portfolio Manager

Samy Muaddi is a portfolio manager in the International Fixed Income Division. He is the portfolio manager of the Emerging Markets Bond Strategy and co-manages the Emerging Markets Corporate Bond and Global High Income Bond Strategies.

Portfolio Manager since

2015

Years at
T. Rowe Price

Years investment experience

Siby Thomas,
Portfolio Manager

Siby Thomas is a portfolio manager and emerging markets credit analyst in the Fixed Income Division. He is co-portfolio manager of the Emerging Markets Corporate Bond strategy.

Portfolio Manager since

2020

Years at T. Rowe Price

Years investment experience

Benjamin Robins,
Portfolio Specialist

Ben Robins is a fixed income portfolio specialist. He is a member of the Global Fixed Income team, supporting our emerging market debt strategies.

Years at T. Rowe Price

Years investment experience

Michael Ganske,
Portfolio Specialist

Michael Ganske is a fixed income portfolio specialist for T. Rowe Price. He is a member of the Global Fixed Income team, supporting our emerging markets debt strategies, which includes hard currency- and local currency-denominated sovereign and corporate debt. He represents the portfolio management team, presenting strategies and market outlooks in meetings and conferences.

Years at T. Rowe Price

Years investment experience

Indicative Benchmark Data Source: JP Morgan. Information has been obtained from sources believed to be reliable but J.P. Morgan does not warrant its completeness or accuracy. The index is used with permission. The Index may not be copied, used, or distributed without J.P. Morgan’s prior written approval. Copyright © 2022, J.P. Morgan Chase & Co. All rights reserved.

Past performance is not a reliable indicator of future performance.

Source for performance: T. Rowe Price. Fund performance is calculated using the official NAV with dividends reinvested, if any. The value of an investment and any income from it can go down as well as up. Investors may get back less than the amount invested. It will be affected by changes in the exchange rate between the base currency of the fund and the subscription currency, if different. Sales charges (up to a maximum of 5% for the A Class), taxes and other locally applied costs have not been deducted and if applicable, they will reduce the performance figures.

Daily performance data is based on the latest available NAV.

The Funds are sub-funds of the T. Rowe Price Funds SICAV, a Luxembourg investment company with variable capital which is registered with Commission de Surveillance du Secteur Financier and which qualifies as an undertaking for collective investment in transferable securities (“UCITS”). Full details of the objectives, investment policies and risks are located in the prospectus which is available with the key investor information documents and/or key information document (KID) in English and in an official language of the jurisdictions in which the Funds are registered for public sale, together with the articles of incorporation and the annual and semi-annual reports (together “Fund Documents”). Any decision to invest should be made on the basis of the Fund Documents which are available free of charge from the local representative, local information/paying agent or from authorised distributors. They can also be found along with a summary of investor rights in English at www.troweprice.com. The Management Company reserves the right to terminate marketing arrangements.

Please note that the Fund typically has a risk of high volatility.

Hedged share classes (denoted by 'h') utilise investment techniques to mitigate currency risk between the underlying investment currency(ies) of the fund and the currency of the hedged share class. The costs of doing so will be borne by the share class and there is no guarantee that such hedging will be effective.

The specific securities identified and described in this website do not represent all of the securities purchased, sold, or recommended for the sub-fund and no assumptions should be made that the securities identified and discussed were or will be profitable.

A full list of the currently issued Share Classes including Distributing, Hedged, and Accumulating Categories may be obtained, free of charge and upon request, from the registered office of the Company.

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Citywire Data Source: Citywire – where the fund manager is rated by Citywire, the rating is based on the manager’s 3-year risk adjusted performance. For further information on ratings methodology, please visit www.aboutcitywire.com.

Overweight Domestically Oriented Sectors

Underweight Lower-Yielding and Less-Attractive Risk-Adjusted Relative Value

Credit Quality Considerations

Risks

Typical Investor

Commentary for