Fixed Income
Portfolio Managers comments
After a quiet start of the year, volatility gradually increased and January became a turbulent month with falling stock prices and rising interest rates. The conflict between Russia and NATO escalated and the risk of a Russian invasion of Ukraine has increased significantly. A lot of diplomatic initiatives were taken by American and European representatives, to try to find a solution, but so far those efforts have not given any substantial results. Although risk premiums have come up due to the deteriorated situation, these types of geopolitical risks are generally very difficult to price. Despite a sharp increase in the spread of the Corona virus in large parts of the world, some countries began to reopen their economies, which will most likely contribute positively to growth, going forward. The inflation rate continued to rise during 2021 according to data published in January. In the US, the annual rate is currently 7%, which is the highest level since 1982 and in Sweden, an yearly increase of 4.1% was reported. However, much of the surge in inflation is explained by temporary effects from higher energy prices which will gradually fall back during the year. In the USA, the figures are also affected by higher prices for, among other things, food and used cars.
The Federal Reserve sent a clear signal that they will raise the Fed Fund´s rate at their meeting in March. Fed chief Jerome Powell also did not rule out that there could be a 50 basis-point increase or that they could raise interest rates at consecutive meetings. Overall, the Fed’s communication increased the likelihood of future interest rate hikes. However, the Fed was a little more restrained in its comments regarding its own balance sheet. They intend to reduce the size of their asset portfolio significantly, but said that this will be done in a predictable way by primarily letting their holdings mature rather than selling bonds outright. In Europe, the situation is different and the underlying inflationary pressure is significantly lower than in the United States, which the ECB has also emphasized. Representatives of the ECB have on a number of occasions also stated that they consider the market’s expectations of future interest rate hikes to be too aggressive. More guidance on the future of European and Swedish policy rates will be provided in February when both the ECB and the Swedish Riksbank hold their regular policy meetings.
The higher volatility also affected the international credit markets, which had a weaker development driven by both higher rates and credit spreads. The Nordic markets held up better, although a certain weakness could also be noted here. The Q4 reporting season has so far shown a relatively good earnings trend among the companies that have reported, which has supported corporate bond prices even though the results have not always been strong enough to live up to equity market expectations. S&P raised the credit rating for steel maker SSAB from BB+ to BBB- which caused the prices of the company’s bonds to rise. The primary market kicked off after the Christmas break as a number of companies issued new bonds. However, the activity was somewhat muted as higher credit spreads has resulted in some discrepancy in price expectations between investors and companies. Simplicity participated in issues in Vostok New Ventures, Euroflorist and Millicom, among others.
Price movements were relatively small in our Nordic funds as Simplicity Liquidity and Simplicity High Yield both rose 0.03% while Simplicity Corporate Bonds fell 0.08%. Simplicity Global Corporate Bond was affected to a greater extent by the weakness in the international credit market and fell 0.61%.
Simplicity Likviditet
Performance YTD: 0.03%
Yield net of fees: 0.30-0.40%
Duration: 0.18 years
Maturity profile: 1.20 years
Simplicity Företagsobligationer
Performance YTD: -0.08 %
Yield net of fees: 2.00-2.10%
Duration: 1.08 years
Maturity profile: 3.32 years
Simplicity Global Corporate Bond
Performance YTD: -0.61%
Yield net of fees: 2.70-2.80%
Duration: 1.85 years
Maturity profile: 3.45 years
Simplicity High Yield
Performance YTD: 0.03%
Yield net of fees: 3.70-3.80%
Duration: 1.58 years
Maturity profile: 3.37 years
Equity Funds
Management comments
Inflation uncertainty, rising covid-19 cases and turbulence over Russia’s mobilization at Ukraine caused equity funds to fall in the opening month of the new year. In the background of the very high volatility prevailing in the markets, companies powered on with continued strong quarterly reports, with sales in particular exceeding analysts’ forecasts so far. The raw material companies also reported high profitability, with both Boliden and Holmen rising in Simplicity Norden, Simplicity Sverige and Simplicity Småbolag Sverige. The funds’ holdings in the banking sector also endured the interest rate concerns well, especially outside Sweden via Danish Sydbank, Spar Nord Bank and Jyske Bank, all of which rose by over 10% in Simplicity Norden, while Preferred Bank, Canadian Western Bank and Sydbank rose in Simplicity Småbolag Global. Valuations of real estate shares reversed in line with the stock market as a whole, however, with slightly more stable development for Simplicity Fastigheter benefiting from the fund’s largest holding, KMC Properties, rising after repeated buy recommendations.
Stock of the month
Sydbank is Denmark’s fourth largest bank, with services primarily for private customers and small to medium-sized companies outside Copenhagen. The company’s shares rose 13% during the month as the bank raised its guidance for 2021, which was followed by increased target prices from analysts. Banks are generally also winners on rising interest rates, as the rise creates good conditions for improved margins as they can charge more for their lending. Sydbank is a holding in both Simplicity Norden and Simplicity Småbolag Global.
Global developments in brief
The temporarily high transitional inflation that central banks have previously talked about has now rather turned into persistently high inflation. In the US, the inflation rate stood at 7% in December, the highest figure in four decades. In the UK, the inflation rate was 5.4%, the highest in 30 years and in the EU the same figure was 5.0%. Inflationary pressures have now also found their way into wage growth, as seen in statistics from the US where wage costs increased sharply last quarter. Interest rate markets and central banks have reacted with higher rates and assurances that inflation will be curbed. The market is currently pricing in four rate hikes from the Fed in 2022, starting in March. Inflation uncertainty, further restrictions resulting from increased virus spread and political turmoil between Russia and the West also contributed to high volatility during the month.
All equity funds developed with negative returns in a very volatile January. Simplicity Småbolag Global defied the stock market falls the best among our equity funds with a decline of -4.9%. Simplicity Norden, Simplicity Sverige and Simplicity Småbolag Sverige ended the month at -7.1%, -10.3% and -11.7% respectively. Simplicity Fastigheter, which fell -9.0%, was among the absolute top in its category.
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