9 August

Monthly Report July 2022

Fixed Income

Portfolio Managers comments

July was another volatile month in rates- and credit markets, as investors continue to balance the outlook for interest rates, inflation and growth.

In Europe, natural gas prices rose significantly during the month due to the dependence on Russian gas, which resulted in the German government buying 30% of energy company Uniper in a bailout operation. Russia’s Gazprom has also informed the EU that it will reduce the flow of gas to Germany from 40% to 20% of normal capacity, resulting in continued pressure on EU energy ministers ahead of the coming winter. In Italy, there was continued political turbulence after the resignation of the Prime Minister and former ECB chief, Mario Draghi. This caused rates on Italian government bonds to rise and contributed to some concern within the EU that the cooperation with Italy regarding security and financial policy may become increasingly difficult in the future. The IMF published its latest forecast for the world economy, in which it cut the outlook for global growth by about 1% for 2022 and 2023. This is the third time in a row that it has revised its forecasts downwards and the reasons behind the action were high inflation, interest rate hikes, the Russian – Ukrainian war and the energy crisis, which all negatively affect growth prospects.

Inflation figures for June remained high. In the US, inflation came in at 9.1% (expected 8.8%), which prompted the US central bank Fed to raise its key interest rate by 75 points for the second meeting in a row. The Fed, led by Jerome Powell, pointed out that the policy rate is now close to a neutral level and that future hikes of this magnitude are not as obvious and will be dependent on incoming data. The market took this as a dovish statement, and rates on US government bonds fell. At the same time, the ECB announced that they are raising the European key interest rate by 50 basis points, which was a larger increase than what was signaled at the June meeting. This means that the deposit rate in the eurozone is no longer negative, which it has been since 2014. ECB President Christine Lagarde justified the rate hike by saying that inflation risks have increased within the eurozone since the last meeting. The ECB also introduced a new tool to counteract rising interest rate differentials between euro countries, the TPI (Transmission Protection Instrument). At the end of the month, US figures indicated that GDP fell for the second quarter in a row, however the labor market is still strong which means that the US is not yet in a technical recession.

The credit market had a good development during the month and above all, real estate bonds took back some of the big falls we saw during June. Credit spreads were volatile, but tightened during the second half of the month as risk assets bounced back. The corporates have started to publish their Q2-reports and most companies are reporting good results but emphasize that future prospects are uncertain. The Nordic credit market has been quiet and activity has been low. However, it is worth mentioning that three-month Stibor rose sharply during the month, which favors the funds’ bonds with floating coupons.

All funds had a positive development during the month as a result of the falling credit spreads. Simplicity Likviditet rose by 0.12% while Simplicity Företagsobligationer, Simplicity Global Corporate Bond and Simplicity High Yield rose by 0.68%, 1.77% and 0.95% respectively. The yields have continued to rise, which means that the current yield is now up to historically high levels in all funds.

 

Simplicity Likviditet

Performance YTD:  -0.69%
Yield: 2.70-2.80%
Duration: 0.18 years
Maturity profile: 1.04 years

 

Simplicity Företagsobligationer

Performance YTD: -5.84 %
Yield: 6.15-6.25%
Duration: 0.81 years
Maturity profile: 3.21 years

 

Simplicity Global Corporate Bond

Performance YTD: -7.33%
Yield: 6.75-6.85%
Duration: 1.72 years
Maturity profile: 2.92 years

 

Simplicity High Yield

Performance YTD: -6.28%
Yield: 8.65-8.75%
Duration: 1.03 years
Maturity profile: 3.09 years

 

Equity Funds

Management comments – July 2022 

Reporting periods are always interesting, but the one that started during the month was interesting in double regards as analysts have stubbornly stuck to high estimates as the stock markets fallen broadly during the year on poorer prospects.  This has made valuations of many companies look very low, and the effect  the company reports would have on share prices and estimates was  therefore particularly interesting. 

The reports have generally been very good and exceeded expectations on average, which has also given a boost to equities.  At the same time, analysts have revised down their forecasts slightly, albeit marginally.  Not least the industrial companies, which have generally been valued down more than the stock market as a whole, delivered good figures where, among other things, ABB rose steeply on its report and on positive confidence in the future after the company’s order intake rose by 20% organically. The upturn benefited Simplicity Norden and Simplicity Sverige, which have larger positions in the stock. Simplicity Sverige also benefited from both Volvo and Atlas Copco moving in the same direction, and in Simplicity Småbolag Sverige Trelleborg rose double digits after reported high sales growth that resulted in increased recommendations from the analyst corps.  The banking sector also performed strongly after the rise in interest rates contributed to increased net interest income.  In Simplicity Sverige, Nordea, SEB and Swedbank rose, and in Simplicity Norden DNB was also a strong contributor.  

During the month, the real estate sector got revenge and Simplicity Fastigheter rose by as much as 18.9%.  The fund’s two largest holdings, Sagax and Balder, both rose by over 30% after reported growth and increased profit from property management.  Simplicity Småbolag Global also rose sharply after revenge for several holdings, including US company UFP Industries, which despite falling timber prices delivered high growth thanks to new product innovations among other things. 

Simplicity Green Impact benefited from continued development towards greener energy sources both in Europe and the US.  During the month, EU members reached an agreement to reduce their demand for natural gas and in the United States, the Democrats presented proposals for climate legislation that would provide $ 369 billion in support for the energy transition.  Enphase Energy, for example, rose by as much as 45% in the portfolio. 

Stock of the month 

Europris’ business concept is both simple and sounds like a paradox: to push prices down in Norway.  Their discount department stores around the country sell everything from food to tools, furnishings and electronics and with sales of NOK 8.7 billion, they are the country’s largest discount department store chain.  The company got a boost during the pandemic when borders to Sweden were closed and Norwegians had to look for cheap alternatives at home instead.  However, growth has continued even after the borders were reopened. In the second quarter of the year reported in July, the company’s sales rose by 5.7% year-on-year, but the EBITDA margin was 48.2% despite rising costs. During the month, the share rose by 24% and benefited both Simplicity Norden and Simplicity Småbolag Global, which have holdings in the share.  

Global developments in brief 

Inflation remained high and surprised again on the upside in, among other places, the United States, where the CPI rose by as much as 9.1% in June compared with the previous year.  The outcome led markets to speculate whether the Fed would raise its key interest rate by a full percentage point for the first time, something Canada’s central bank did during the month. However, the outcome was an increase of more expected 0.75 percentage points, while the European Central Bank raised by half a percentage point.  Still, the economy appears to remain strong.  In the US, unemployment was recorded  near a 50-year low, quarterly reports have been good and in Sweden GDP rose by as much as 1.4% in the second quarter compared with the first quarter.  As investors have become accustomed to high inflation and hawkish central banks while the economy holds its footing, many are wondering if the decline is through for this time.  With then question in mind, most stock markets rose globally during the month.  

All of Simplicity’s equity funds performed positively, with Simplicity Fastigheter rising the most by as much as 18.9% while Simplicity Småbolag Global, Simplicity Norden and Simplicity Sverige rose 9.9%, 3.8% and 5.7%, respectively. Simplicity Småbolag Sverige ended the month with an increase of 7.6% while Simplicity Green Impact rose by 5.5%. 

 

 

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