Fixed Income
Portfolio Managers comments
November was yet another busy month where the markets fluctuated in line with the news flow.
In China, the authorities imposed new restrictions after major outbreaks of Covid 19 in a number of large cities. The measures caused a lot of anger among the Chinese people and there have been reports of large demonstrations in several cities against the government’s harsh Corona strategy. The situation is difficult for the regime in Beijing, which is not used to these kind of protests and also want to do what they can to maintain economic activity. Even though a lot of measures have been taken through various support packages, the market is worried about how lower Chinese growth will affect the global economy. It has been reported that a lot of companies are starting to reevaluate China as a production country as well as a market. At the end of the month, however, certain statements were made by government officials about a possible relief of China´s harsh covid strategy, something that was well received by the markets. In the US, the mid-term elections did not become the wave of Republican success that some forecasters believed, as the Democrats managed to retain the majority in the Senate. However, they lost power over the House of Representatives, which makes it difficult for President Biden to get his policies through congress. In Sweden, the new government presented its first budget. However, those who had hoped for a boost from an expansionary fiscal policy were disappointed as the budget was characterized by great caution due to the uncertain economic situation.
The US inflation figures published during the month showed lower inflation than expected, which triggered a rally in the markets. Although most analysts agree that there are a couple of rate hikes left from the Fed, expectations are that the end of the tightening cycle is getting closer. The chairman of the Fred, Jerome Powell, also made a statement that in which he indicated that it may soon be time to slow down the pace of the rate hikes. The Swedish head line inflation rate fell in October compared to the previous month but the decline was mainly explained by falling energy prices and the underlying inflation was higher than expected. This caused Swedish bond yields to rise. Higher mortgage rates together with record high energy prices have also caused a lot of uncertainty in the housing market, and further price declines for apartments and houses were reported during the month. The high inflationary pressure was also the main argument behind the Riksbank´s decision to raise their key interest rate by 0.75 percentage points to 2.50 percent. The interest rate path was also raised and now indicates that the key interest rate will land at just under 3 percent in 2023. The Riksbank will also reduce its holding of assets during the next year.
In the credit markets, the strong trend continued and credit spreads continued to fall. In addition to higher expectations of reduced monetary policy tightening, the positive sentiment was also explained by the fact that the yields have reached attractive levels where investors are looking to re-enter the market. The credit management company Intrum was forced to issue a profit warning after having to make another large write-down of the value of a portfolio of Italian assets. The German real estate company Aroundtown announced that it does not intend to call one of its outstanding hybrid bonds at the first call date early next year. The announcement affected hybrid bonds issued by Swedish real estate companies negatively. Real estate company Corem announced that they have signed a letter of intent for the sale of a large portfolio to a non-disclosed international investor. The deal is expected to be closed in the spring and the news caused the price of the company’s bonds to rise. SBB carried out a major deal, in which it sells 49 percent of a portfolio of educational properties to the Canadian investor, Brookfield, for SEK 9.2 billion. The proceeds from the sale will be used to repay debt and the announcement was well received by both equity- and bond markets. Primary market activity increased from low levels and Simplicity participated in new issues in Metso Outotec, Electrolux and Telefonica among others.
All credit funds had a positive development during the month. Simplicity Likviditet rose by 0.29%, while Simplicity Företagsobligationer, Simplicity Global Corporate Bond and Simplicity High Yield rose by 0.88%, 1.69% and 1.38%.
Simplicity Likviditet
Performance YTD: -0.10%
Yield net of fees: 4.10-4.20%
Duration: 0.20 years
Maturity profile: 0.98 years
Simplicity Företagsobligationer
Performance YTD: -6.79 %
Yield net of fees: 8.00-8.10%
Duration: 0.94 years
Maturity profile: 3.02 years
Simplicity Global Corporate Bond
Performance YTD: -9.94%
Yield net of fees: 9.80-9.90%
Duration: 2.19 years
Maturity profile: 2.99 years
Simplicity High Yield
Performance YTD: -6.91%
Yield net of fees: 11.10-11.20%
Duration: 1.21 years
Maturity profile: 2.80 years
Equity Funds
Fund management comments
Equities continued its positive momentum during the month after stock markets turned upwards in October. The sentiment has made a U-turn and prices are now reacting more strongly to positive news than to negative ones. One example is the latest inflation figure in the US, which came in at 7.7%, a high level 0.2 percentage points below expectations which was still enough to create a jolt of joy on the world’s stock markets. Some say fears of missing out on a bear market rally are behind it, pointing out that investors have lately loaded up on buy-options, securities that rise a lot in value when stocks rise.
In statements, the members of the US Federal Reserve have maintained a hard line that contrasts with market developments. However, the fact that more investors are calling the central bank’s hard communication as bluff is not unjustified. Central banks in the UK, Australia and Norway were more cautious in communication or interest rate hikes with the motivation that the economy is seen weakening and thus also reducing inflationary pressures. Perhaps central bank governors are now becoming more cautious as they notice that further hikes are having a too weak effect on the margin. Equities are thus facing an interesting winter where the balance between the economic developments and inflationary pressures becomes more interesting and a weakening economy does not necessarily have to be negative for share prices.
The easing of interest rate anxiety in the markets meant that real estate shares rose steeply during the month, and Simplicity Fastigheter rose by as much as 7.8%. Several real estate companies have started to reduce their leverage in different ways. SBB sold assets, Balder repurchased bonds and Castellum cancelled its dividend.
Pharma companies continued to develop positively for a year where focus has shifted from covid vaccine revenue to success in R&D. AstraZeneca rose in Simplicity Norden and Simplicity Sverige after an EU approval of cancer treatments. Both Genmab and Novo Nordic, holdings in Simplicity Norden and the latter also in Simplicity Green Impact, released reports that were clearly better than expected, and BioArctic (Simplicity Småbolag Sverige) soared after the company was granted a patent in the United States.
The funds’ consumer companies also performed generally well across the funds. In Simplicity Norden and Simplicity Sverige, Essity and AAK rose steeply, while New Wave Group surged in Simplicity Småbolag Sverige after reporting a record quarter well above expectations. In Simplicity Småbolag Global, Goldwin, a Japanese industry colleague of New Wave, rose for a similar reason.
Hopes of easing restrictions in China gave a boost to both commodity prices and commodity companies. In the home market funds Simplicity Norden, Simplicity Sverige and Simplicity Småbolag Sverige, Boliden, SSAB, Lundin Gold, Holmen and SCA rose and in Simplicity Småbolag Global, Tokyo Steel lifted.
In Simplicity Green Impact, the Chinese manufacturer of electric bicycles and e-scooters Yadea soared after exciting new product releases. German electricity producer PNE also continued to rise in the fund as the company’s profitability looks set to improve and new expansion plans were announced.
Stock of the month
Diodes Inc. designs and manufactures semiconductor products such as transistors, diodes, power switches, operational amplifiers, LED drivers, multiplexers, stabilizers, reset circuits and other types of advanced integrated circuits. The company’s high-tech products have a variety of applications that can be found in cars, lighting, electrical supply equipment and consumer electronics such as computers, mobiles, monitors and game consoles. During the month, the Texas company reported above expectations and increased its profit by 36% compared to the same quarter last year. Sales growth also remained strong, driven by high demand from the automotive industry. The share rose by 23% during the month but, despite strong growth, has been valued down significantly during the year. The low P/E ratio of 12.2 calculated with realized earnings per share is difficult to understand given a high underlying growth in digitalization, electrification and development of smart products. The company is an example of semiconductor companies that Simplicity Småbolag Global has invested in. The fund has several holdings with similar operations to Diodes and during the month three more companies in the sector were added to the portfolio: Melexis, Cirrus Logic and Vishay Intertechnology.
Global developments in brief
In China, the government initially tried to ease the tough corona restrictions somewhat, which led to major lockdowns and isolation of the population as the spread of infection rose. As a result, large protests erupted, which seems to have led the government to once again want to ease restrictions as well as vaccinate more elderly people. Chinese policymakers also have headaches from the economy which appears to be developing weakly. The purchasing managers index points to contraction and both the latest figures for imports and exports fell during the month. In response, the capital requirement for banks has been lowered, a trick frequently used in the country.
Inflation around the world remained at a high level, although there are more signs that the peak has been reached. Recent inflation figures include 10.7% in the euro area, 7.5% in Norway and 9.3% in Sweden. Central banks largely followed expectations with further increases of larger magnitudes. For example, the Riksbank raised its key interest rate by 0.75 percentage points to 2.5%, and in the background, Swedish house prices continued to fall.
Simplicity Småbolag Global rose by 0.7% and Simplicity Green Impact fell marginally by 0.2%. Simplicity Norden ended the month 5.0% up together with Simplicity Sverige and Simplicity Småbolag Sverige, which rose 5.1% and 4.7%, respectively. Simplicity Fastigheter rose the most by 7.8%.
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