Portfolio Managers comments

February was a busy month with an extensive news flow. In the United States, the issue of the American debt ceiling came back up on the agenda. As a consequence of the large budget deficits the ceiling must be raised in order to prevent a US default later this year. Although few observers expect this to happen, there is a risk that the uncertainty could lead to volatility in the financial markets. The global economy is holding up surprisingly well and many indicators now suggest that the expected recession may be delayed or even avoided. This picture is confirmed by, for example, the strong labor market, which shows few signs of slowing down. While this development is positive, the flip side is that inflation has proven to be stickier than expected. This was confirmed by the inflation figures published during the month indicating that price pressures remain high in most countries.

The US central bank Fed, raised its key interest rate by 0.25 percentage points while saying that future rate decisions will depend on incoming data. However, the minutes from the Fed meeting, which were released a few weeks after the decision, showed that the Fed-members are still focused on the upside inflation risks and that a rate cut will not be considered until the inflation rate approaches the  two percent target. In Europe, the ECB raised its key interest rates by 0.50 percentage points and signaled that they will raise by another 50 basis points in March, but that any actions thereafter will be determined by how inflation develops. The Riksbank chose to raise their policy rate by 0.50 percentage points at the newly appointed Governor of the Riksbank, Erik Thedéen first meeting.

In addition to the rate hike, the Riksbank also announced that it intends to tighten monetary policy further, by selling long-term government bonds starting in April. This announcement led to higher interest rates and to the strengthening of the Swedish krona after a long period of weak development. The overall assessment of the central banks’ actions and communications suggests that the peak of the interest rate cycle is further ahead than investors had hoped for and the market is now pricing in further rate hikes. At the same time, the timing of the first interest rate cuts has been postponed.

After a strong start to the month, rising interest rates caused bond prices in the international credit market to fall back. The Nordic corporate bond market was more resilient due to, among other things, the fact that many Nordic bonds are issued in FRN-format and that the underlying yields are higher in the Nordics. The Q4-report season is almost completed and the outcomes have been somewhat varied. The real estate companies’ reports have been in focus and the general trend is that valuations have been written down due to higher yield requirements, but that the adjustments have been mitigated by higher rental income. At the same time, the activity in the sector has been high as the companies have taken various steps to strengthen their balance sheets. Castellum announced a new equity issue of ten billion SEK, while Balder made a convertible issue of 480 million euros and Heimstaden Bostad raised SEK 4.5 billion in new capital, which will be used to buy back outstanding bonds. Corem announced the sale of 17 properties in the Stockholm area for SEK 949 million and SBB announced that they are contemplating a listing of its subsidiary Sveafastigheter, which owns residential properties.

The above transactions are a few examples of what has been done recently which demonstrates the fact that the companies are prepared to act vigorously to defend their credit ratings and secure their funding. Despite this, Moody’s chose to cut Balder’s credit rating from Baa3 to Ba1, which makes them a fallen angel. The opinion of Balder varies, however, as S&P has a credit rating of BBB on the company. The logistics companies Scan Global Logistics (SGL) was divested by their current owners to the Private Equity company, CVC Capital Partners. The deal was expected but was nevertheless well received by the market. As part of the transaction the company issued new bonds and redeemed outstanding bonds, which contributed positively to the development of our funds. Primary market activity was good and, in addition to SGL, we participated in new issues in Volvo Cars, Billerud and Nordnet, among others.

All funds benefited from the strong market sentiment. Simplicity Likviditet and Simplicity Företagsobligationer rose by 0.47% and 1.15%, while Simplicity Global Corporate Bond and Simplicity High Yield rose by 0.25% and 1.66% respectively. Despite recent gains, yields are still at high levels in all funds.