Portfolio Managers comments
The current state of the world economy with high inflation and deteriorating growth prospects led to continued high volatility in the markets during October.
The International Monetary Fund, IMF, released a new economic forecast in which they lowered their growth projections. They expect global growth to fall from 3.2% in 2022 to 2.7% in 2023 which is the lowest level since 2001 with the exception of the financial crisis and the most acute phase during the Covid pandemic. At the same time, they expect inflation to reach a level of 8.8% in 2022, but that it will fall back in 2023 and 2024. In the UK, the government was forced to withdraw the heavily criticized tax cut proposals that led to surging rates in British government bonds. However, this was not enough to restore confidence for Prime Minister Liz Truss who was forced to resign. She was replaced by Rishi Sunak who was Chancellor of the Exchequer in Boris Johnson’s government and who now has to shoulder the great challenge of restoring confidence in the British economy. In Sweden, the newly appointed Finance Minister Elisabeth Svantesson presented the Ministry of Finance’s report on the state of the Swedish economy. The report, which precedes the budget to be presented later in November, paints a gloomy picture of the Swedish economy, characterized by major global challenges.
The European Central Bank ECB raised its key interest rate by 75 basis points for the second meeting in a row. However, the decision was not unanimous as three members wanted to raise the interest rate by 0.50 percentage points. The comments from the ECB in conjunction with the meeting were also interpreted as somewhat softer, causing rates to fall back after the announcement. The inflation figures published during the month showed continued high price increases in most economies, such as the Swedish one, where the inflation rate rose to 9.7% on an annual basis in September, driven by higher food and energy prices. After a few months of declining inflation figures in the US, the trend leveled off in September, which reduced hopes that the US economy would be past the largest price rises. Now it remains to be seen whether the September outcome constituted a parenthesis and whether the trend of falling inflation in the US can resume.
In the international credit market, there was a recovery as risk appetite increased due to hopes that central banks may be approaching a point where they can begin to reduce their tightening measures. However, the Nordic market did not keep up with this development as it was affected by continued high uncertainty for the Swedish real estate companies. Investors continue to worry about how lower property valuations as well as higher interest rates and credit spreads will affect the companies. Many of the Swedish property companies have released their reports for the third quarter and the overall picture is that the development has been relatively good during the first nine months of the year, but that uncertainty is high regarding the future. Some of the companies also chose to write down the valuation of their property portfolios against the backdrop of rising yield requirements, but the changes have been relatively small so far. One of the events that attracted most attention in the market was Rutger Arnhult’s sale of a large portion of his holding in Castellum to Akelius Fastigheter. The shares were divested by Arnhult’s investment company M2 to meet financing commitments and can be seen as a major loss of prestige for Arnhult, who will however remain as CEO of Castellum. Akelius, on the other hand, has been given the opportunity to take a large position in one of the largest Nordic real estate companies at a time when the assets are traded at a large discount on the stock market. Akelius is financing the purchase by using part of the funds obtained in connection with the sale of a large property portfolio to Heimstaden Bostad approximately a year ago. In hindsight, the timing of that deal appears to have been very successful, given the valuation they received for the properties they sold. In addition, the proceeds from the sale have been invested in US dollars, which have risen sharply in value against the Swedish krona. Another large Swedish real estate company, SBB, announced that they intend to put their residential properties in a separate company which will be distributed to their shareholders and listed on the stock market.
In the primary market, activity was low as many companies were in quiet periods ahead of their reports, but also because they think that it is not favorable to issue new bonds as market conditions are uncertain and credit spreads are high. The real estate company Balder and Klarna Bank announced the buyback of outstanding bonds and this was received positively by the market.
Simplicity Likviditet rose by 0.07% while Simplicity Corporate Bonds, Simplicity Global Corporate Bond and Simplicity High Yield fell by 0.93%, 0.30% and 1.19%.
Performance YTD: -0.39%
Yield net of fees: 3.60-3.70%
Duration: 0.19 years
Maturity profile: 1.01 years
Performance YTD: -7.60 %
Yield net of fees: 8.00-8.10%
Duration: 0.81 years
Maturity profile: 3.03 years
Simplicity Global Corporate Bond
Performance YTD: -10.95%
Yield net of fees: 10.30-10.40%
Duration: 2.13 years
Maturity profile: 3.02 years
Simplicity High Yield
Performance YTD: -8,18%
Yield net of fees: 12.20-12.30%
Duration: 1.05 years
Maturity profile: 2.78 years
GDP growth in Sweden in the third quarter surprised positively and rose by 0.7% compared with the previous quarter, according to Statistics Sweden’s indicator. The increase was in line with the many quarterly reports released during the month. So far, as earlier in the year, company reports have been good and showed little sign of an impending recession. Despite a strong last year, the majority who reported have managed to grow both earnings and sales compared to the corresponding period in 2021. The analysts thus seem to have done the right thing in stubbornly sticking to seemingly high estimates, while the stock market has fallen steeply.
For the Swedish export companies, things have gone particularly well, as a weakened krona not only seems to have helped the sales figures, but also made a difference in order intake. On the theme, Sandvik, Atlas Copco, Trelleborg, Munters, Hexpol and Hexatronic all rose with double digits in the funds. The latter, which during the month also released a reverse profit warning, increased sales by 91% compared to the same quarter last year and the stock rose by over 40%. Hexpol, which is a holding in the home market funds Simplicity Norden, Simplicity Sverige and Simplicity Småbolag Sverige and is also found in Simplicity Småbolag Global, beat expectations despite continued delivery problems and increased material costs. Organic sales growth for the quarter amounted to a whopping 21%.
Studsvik, a holding in Simplicity Småbolag Sverige, rose sharply partly thanks to a good report that testified to rising demand in Germany and partly thanks to the fact that Sweden’s new government intends to invest in nuclear power. The fund’s holding in IT consultant Addnode also jumped with an increase of 24% during the month as a result of continued strong demand and earnings that have now risen by 114% in the last 12 months.
HVAC companies were behind strong returns in Simplicity Småbolag Global, where Comfort Systems and Emcor (also holdings in Simplicity Green Impact), both from the US, reported strong figures and continue to work to catch up with demand. The fund’s largest holding, IT-company ExlService, also beat expectations and raised its guidance for the full year, leading to a 23% rise in the stock. American IT companies otherwise had a mixed month where both Meta Platform’s and Amazon.com declined outside Simplicity’s funds after deteriorating profitability. U.S. restrictions on chip exports to China also negatively impacted American semiconductor companies.
The returns in Simplicity Green Impact were somewhat subdued by lower gains for sustainable power supply companies. Arise fell along with other Swedish wind power companies, as the new government seems less positive about the energy source. However, the fund’s holdings generally released good reports, including the likes of Hubbell and Badger Meter which has had particularly high demand for their smart digital water meters.
Real estate stocks had another eventful month, where the sector’s initial declined due to rising interest rates was followed by strong reports for real estate companies after widely increased profits from property management and stable values of their property portfolios.
Stock of the month
Munters is a Swedish manufacturer of products for climate control such as ventilation, cooling, dehumidification and air purification. The products are used in a wide range of industries including agriculture, food, data centers and pharmaceuticals. Munters also qualifies as a holding in our dark green fund with sustainability focus, Simplicity Green Impact, as the products are energy efficient and enable conversion to electric vehicles as a large part of the world’s lithium batteries for electric vehicles are manufactured in environments with the company’s energy-efficient dehumidification equipment. During the month, the company reported organic growth of as much as 22% and earnings during the quarter were above expectations. After the report’s release, analysts raised their target prices for the company, pointing to continued strong growth in segments such as data centers and battery manufacturing, while higher prices are expected to compensate for higher costs.
Munters is a large holding in Simplicity Småbolag Sverige and is also found in Simplicity Green Impact, Simplicity Sverige and Simplicity Norden. The stock rose 10% during the month.
Global developments in brief
Long-term interest rates stabilized slightly during the month despite strong U.S. jobs data which leaves room for the Fed to hike more. In both the US and Sweden, inflation figures came in high and above expectations, something markets are now used to. As expected, the ECB raised its key interest rate by 75 basis points and reiterated the message that the fight against inflation is at the top of the agenda. Financial markets were also impacted by political chaos in Britain, where Liz Truss eventually had to resign after a record short time as prime minister after her proposals for tax cuts caused the pound to plummet. The major Swiss bank Credit Suisse also worried markets during the month as a reorganization is needed in the company after years of scandals. The market liked neither management’s statements nor actions and valued the stock down sharply. Thumbs down were also given to China’s party congress where incumbent Supreme Leader Xi Jinping was re-elected for life. Markets were missing major statements about the country’s zero tolerance of covid-19, prompting foreign investors to reduce their investments in the country.
All equity funds rose during the month, driven by the strong reporting. Simplicity Småbolag Global and Simplicity Green Impact advanced 8.3% and 3.3%, respectively. Simplicity Norden ended at 6.2% together with Simplicity Sverige and Simplicity Småbolag Sverige which went up 6.4% and 5.7% respectively. Simplicity Fastigheter followed the rise with 5.4%.
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