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.