Portfolio Managers comments
After a quiet start in August with stable returns in most asset classes, volatility and risk aversion rose gradually. The main explanation for the deteriorating sentiment was increased concern that high inflation will force central banks to raise their policy rates more than expected, which caused yields on government bonds to rise across the board.
High energy prices continued to cause problems and during the month there were reports that some companies will be forced to take drastic measures, such as shutting down production, in order to manage the situation. The Russian energy company Gazprom continued to limit its supplies of gas to Europe under the pretext that the Nord Stream gas pipeline is in need of maintenance work. However, the real reason is believed to be that the gas deliveries are used as a pawn in the power game between Russia and Europe, linked to the sanctions imposed on Russia after the invasion of Ukraine. The high gas prices also affected the Swedish electricity prices, which reached new record levels during the late summer. Most analysts also expect that the high prices will persist, which will be painful for many Swedish households. However, a certain glimmer of light could be seen when Germany reported that the replenishment of the strategic gas inventories that the politicians had decided on, went faster than expected. This news caused gas prices to drop sharply, albeit from very high levels.
At the annual central bank conference in Jackson Hole, Fed chief Jerome Powell gave a speech in which he underlined the importance of the war against inflation. He also said that he is aware that the measures currently being implemented in the form of interest rate hikes and other forms of monetary tightening are painful for both households and businesses, but that they are necessary to avoid an even worse situation in the future. He further pointed out that the size of future interest rate hikes will depend on incoming data, which means that both labor market and inflation figures will be more important than ever to follow. Market pricing currently indicates a high probability of a 75 basis point hike at the September meeting and forecasts of future rate cuts have been postponed. In Europe, a number of ECB members made hawkish statements that led to the conclusion that a 0.75 percentage point hike may be in play in Europe as well. Swedish inflation in July was somewhat lower than the market’s expectations but significantly higher than the Riksbank’s forecast from June, which increases the pressure on them to act forcefully. In China, the economy is still struggling with the effects of the extensive covid lockdowns and problems in the domestic real estate sector. This prompted the Chinese central bank to cut a number of key interest rates in an un.
In the credit markets, the beginning of August was strong, but as volatility increased, the market weakened and the month ended with rising credit spreads and falling bond prices. The Q2 reports that were released offered a mixed set of results, but in summary most companies have managed to meet expectations. The primary market activity was low due to seasonal factors but activity increased as things started up slowly after the holiday season. Initially, it was mainly Investment Grade companies in the banking, financial and industrial sectors that chose to issue new bonds, but the High Yield market also got underway at the end of the month. The Swedish real estate companies, which are usually large issuers, have to a large extent been in a wait-and-see mode and a number of companies chose to refinance maturing bonds through other sources of funding such as bank financing. However, a few real estate companies tested the market, among them the Swedish company Cibus, which primarily owns food retail properties. They issued a 3-year bond with a coupon rate of 3-month Stibor plus 595 basis points, which currently yields 7.24%. Simplicity participated in new issues in Industrivärden, Lifco and Nordea, among others.
Despite the high volatility, all funds except Simplicity Global Corporate Bond had a positive development. Simplicity Likviditet, Simplicity Företagsobligationer, and Simplicity High Yield rose by 0.31%, 0.78%, and 1.44%, respectively, while Simplicity Global Corporate Bond fell by 0.03%. The yields are still at high levels, which contributes to a higher running yield in all funds.
Performance YTD: -0.38%
Duration: 0.18 years
Maturity profile: 1.05 years
Performance YTD: -5.12 %
Duration: 0.80 years
Maturity profile: 3.18 years
Simplicity Global Corporate Bond
Performance YTD: -7.36%
Duration: 1.83 years
Maturity profile: 3.03 years
Simplicity High Yield
Performance YTD: -4.93%
Duration: 1.07 years
Maturity profile: 3.01 years
After a strong stock market month in July, markets’ performance was more subdued in August. Hawkish tones aimed at fighting inflation from both the U.S. Federal Reserve and its European counterpart the ECB prompted the market to price in weaker times and bigger rate hikes in September.
In light of the somewhat gloomier market picture and the recent price decline, we once again see that valuations have come down to lower and interesting levels. The Swedish stock exchange is today cheaper than it normally has been for the past ten years. Another sign of strength is that Sweden currently has an underlying economy that is very strong. Despite increased costs and declining sentiment, both household consumption and business investment are today at very high levels and above trend. This, in turn, is the driving force behind the strong labour market. There are many signs that the Swedish economy is facing a slowdown, but due to several strong underlying factors, we believe that there are conditions for a soft landing.
Our global funds, Simplicity Green Impact and Simplicity Småbolag Global developed positively during the month with an increase of 3.2% and 1.1%, respectively. Simplicity Green Impact beat its benchmark index during the month thanks to several strong holdings. For example, Orrön Energy and Arise, both Swedish companies active in renewable energy, went up by 62% and 40%, respectively. U.S. lithium company Livent also had a strong month and gained 29%. The company has reported strong sales growth and is investing in increased production capacity to be able to meet the growing demand for lithium from, for example, the electric car market and green energy technology. In Simplicity Småbolag Global, it was mainly the Asian and American companies that contributed positively via consumer companies such as the Korean clothing manufacturer Youngone and the Singaporean supermarket chain Sheng Siong Group. The American fashion company Oxford Industries also had noteworthy development following news that its own brand Tommy Bahama will release a collection for dogs this autumn.
Our home market funds had a negative development, but like Simplicity Green Impact nevertheless outperformed their respective benchmark indices by several percentage points. Simplicity Norden, Simplicity Sverige and Simplicity Småbolag Sverige benefited partly due to their lower exposure to the industrial sector, which had a weak development during the month, as well as through increased allocations to certain companies in healthcare and finance. In finance, for example, the insurance company TopDanmark, a holding in both Simplicity Norden and Simplicity Småbolag Sverige, had an increase of over 9% during the month. In the healthcare sector, it was primarily the takeover bid for the healthcare company Karo Pharma that contributed positively to the development of our home market funds. Simplicity Småbolag Sverige also benefited from a bid for the technology consultant Semcon. For Simplicity Fastigheter, Logistri Fastighets AB and K2A stood out as particularly strong contributors.
Stock of the month
Swedish Orphan Biovitrum, also called Sobi, is a biopharmaceutical company focused on rare diseases. Sobi provides treatments in hematology, immunology and niche indications. The business is global. Sobi has shown good growth and high profitability for many years and this summer delivered a report that beat market expectations. In early August, Sobi received the “overweight” recommendation from a large U.S. analysis house. The analysis highlighted the company’s order intake and defensive growth opportunity. During the month, the company gained almost 6% and thus benefited Simplicity Norden, Simplicity Sverige and Simplicity Småbolag Sverige, all of which have holdings in the share. The good stock market performance for the company once again confirms the basic idea of Simplicity’s philosophy of investing in quality companies.
Global developments in brief
During the month, data on July inflation was received for the United States, which was noted significantly lower than expected and fell to 8.5%. In comparison, inflation stood at 9.1% in June. The figure caused markets to breathe a sigh of relief, and there was speculation about whether the Fed would raise rates at a slower pace. However, the optimistic hopes were short-lived after another strong U.S. jobs figure and a hawkish statement by Jerome Powell of Jackson Hole. The Fed stressed that inflation remains at too high levels and needs to be vigorously combated, with the result that, after the statement, stock markets have fallen and interest rates have risen.
What is needed for central banks’ monetary policy to ease is a weaker labour market and clear signs that inflation is falling permanently. That being said, macroeconomic data will remain important to follow for the market going forward as well. Today we see several indicators that show that inflation may be on the way down. The pressure on the Global Supply Chain Pressure Index is falling and the price of several inputs is falling. At the same time, we see that the price of energy is rising, which may drive inflation. Strong labour markets are in themselves a phenomenon all over the world. The market thus continues to be shaped by, above all, the struggle between lower economic conditions and high inflation, and by the increasing energy crisis.
Simplicity Småbolag Global and Simplicity Green Impact developed positively during the month. Simplicity Green Impact rose the most by 3.9% while Simplicity Småbolag Global advanced 1.1%. Simplicity Norden fell 1.0% together with Simplicity Sverige and Simplicity Småbolag Sverige, which ended the month with declines of 3.8% and 5.3%, respectively. Simplicity Fastigheter followed the decline with 4.8%
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