Fixed Income
Portfolio Managers Comments
The volatility in the financial markets was very high in may due to uncertainty about the future economic development. The inflation figures that were published showed that price pressures are at high historical levels. At the same time, the general economic activity is good and the labor market is strong, which puts pressure on central banks to continue to raise interest rates and reduce their asset purchases. This has led to concerns about that a too tight monetary policy could lead to a recession. The best scenario would be if the central banks could manage to reduce inflationary pressures through their measures and thereby achieve a soft landing in the economy. This will be a difficult balancing act that will have a major impact on future market developments. The war in Ukraine continues to cause problems and during the month the EU imposed new sanctions against Russia which include an import ban on Russian oil, new entry bans, more frozen assets and an exclusion of the Russian bank, Sberbank, from the payment system, Swift. On the positive front, it can be noted that Chinese authorities decided on a gradual reopening of Shanghai, which has been in lock down due to Covid during a couple of months. Some of the economic data that was published in May also showed a slightly better development than expected for the Chinese economy.
In Europe, various ECB representatives gave indications an imminent rate hike and most analysts now expect a rate hike during the summer. As expected, the US Federal Reserve raised its interest rate by 0.50 percentage points and expectations are that the Fed will continue to raise interest rates at the same pace in the coming months. The minutes from the Fed meeting also showed that members are determined to act quickly to curb the high inflation and that they are currently not particularly worried about the negative effects that a tighter monetary policy may have on growth. In their Financial Stability Report which was published during the month, the Swedish Riksbank highlighted high inflation and higher interest rates as a risk for Swedish households and real estate companies, among others.
In the credit market, the weak development continued and both international and Nordic corporate bonds fell during the month. The Itraxx Crossover index, which shows the cost of hedging default risk in European High Yield companies, rose sharply and is currently trading at levels that, with the exception of a short period during spring 2020, are the highest since 2013. The Q1 reporting season is more or less completed and most companies have reported good results and the higher credit spreads are thus a reflection of lower risk appetite and concerns for the future rather than deteriorating credit quality. The Danish industrial company Frontmatec was acquired, which caused the price of the company’s bonds to rise. This contributed positively to the performance in our funds. Primary market activity was low against the background of the weak sentiment, and it was mainly Investment Grade companies that chose to issue new bonds. Simplicity participated in issues in AB Volvo and Sörmlands Sparbank, among others.
All funds were affected by the pessimism in the market and had a weak development. Simplicity Likviditet decreased by 0.26% while Simplicity Företagsobligationer, Simplicity Global Corporate Bond and Simplicity High Yield fell by 1.37%, 0.90% and 1.51% respectively. The yield in all funds has risen as a consequence of the higher credit spreads, which gives a higher current rate of return.
Simplicity Likviditet
Performance YTD: -0.50%
Yield net of fees: 1.50-1.60%
Duration: 0.19 years
Maturity profile: 1.12 years
Simplicity Företagsobligationer
Performance YTD: -3.55 %
Yield net of fees: 4.60-4.70%
Duration: 0.84 years
Maturity profile: 3.37 years
Simplicity Global Corporate Bond
Performance YTD: -5.41%
Yield net of fees: 5.40-5.50%
Duration: 1.74 years
Maturity profile: 3.13 years
Simplicity High Yield
Performance YTD: -3.56%
Yield net of fees: 6.50-6.60%
Duration: 0.99 years
Maturity profile: 3.22 years
Equity Funds
Management comments
The stock market continued downwards in May but recovered toward the end of the month where lower valuations and easing of China’s pandemic restrictions cheered up investors. The funds’ financial companies continued to be among the top holdings, with Nordea being the best contributor in Simplicity Sverige. For Simplicity Norden, Sampo, Danske Bank, DNB and Jyske Bank also rose sharply, and in Simplicity Småbolag Global, Sydbank, United Community Banks and Southside Bank developed in the right direction. On the other side of the scale, consumer companies in particular weighed with generally weak performances after Walmart reported declining margins and consumers’ purchasing power is expected to deplete.
The performance of the real estate stocks remained very sprawling. Sagax, one of the largest holdings in Simplicity Fastigheter, rose by a whopping 6% after the company’s quarterly report showed increased profit from property management. The fund fell by 4.1% during the month after weaker performance for the construction-related companies.
During the month, we also received an addition to Simplicity’s equity fund offering. The sustainably focused Simplicity Green Impact started on May 23 and by the end of the month the fund was up 1.2%. It was primarily the fund’s US holdings, such as Steel Dynamics and HP Inc, that contributed to the positive development. FirstGroup from the UK also showed a good development after a takeover offer.
Stock of the Month
By 2050, the EU aims to become climate neutral, which means that the EU should have no impact on the climate. A crucial part of the EU’s green transition plan is to replace fossil fuels with renewable energy, such as solar, hydro and wind power. As a result, large investments are being made in fossil-free energy sources, which has led to companies like Spanish Solaria growing rapidly. Solaria specializes in solar energy; they develop photovoltaic technology, manufacture photovoltaic panels, and develop and manage photovoltaic systems. Solaria is active in southern Europe and, above all, in Spain. Spain is one of the sunniest countries in Europe and therefore an attractive choice for the placement of solar panels. Despite this, the share of the country’s energy produced from solar power is less than the share of energy that comes from solar power in winter-dark Sweden. The reason is that a Spanish tax law, today removed since 2018, has made it expensive to invest in solar power in Spain for many years. With the Spanish solar power tax removed and with the EU’s climate goals behind it, the conditions and future potential for developing and managing solar power in Spain have never looked better than they do today. We like Solaria as they have a great growth potential and also a very high profitability. The stock currently weighs around 1% in Simplicity Green Impact.
Global developments in brief
The month began with interest rate hikes from several of the world’s central banks to control the continued high inflation. The biggest focus, as usual, was on the U.S. Fed, which raised its policy rate by 0.5 percentage points to the range of 0.75% – 1%. Meanwhile, Fed members played down the likelihood of hikes by 0.75 percentage points. As the picture clears up over how the high inflation in the world will be handled by central banks, the market’s focus has shifted somewhat to the general economy. The war in Ukraine looks set to be more protracted than previously thought and will particularly negatively affect Europe’s economy. In addition, China’s pandemic restrictions are being noticed on both retail sales and industrial production, something that is met with expansive measures from the country’s government.
All of Simplicity’s equity funds except the aforementioned Simplicity Green Impact developed negatively, with Simplicity Fastigheter down by 4.1% while Simplicity Småbolag Global, Simplicity Norden and Simplicity Sverige declined by 2.6%, 3.8% and 4.2% respectively. Simplicity Småbolag Sverige ended the month with a decline of 5.0%.
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