Fixed Income
Portfolio Managers comments
In September, the volatility in the financial markets increased due to concerns regarding the recovery in the global economy. In China, the problems continued for the real estate developer Evergrande, which is struggling with high leverage after many years of debt-financed growth. The company has defaulted on interest payments on its bank loans and there are rumors of an impending restructuring of the company. The whole situation is complicated by the fact that Evergrande has partly financed its business through savings products aimed at private investors and by the fact that many private individuals have made down payments on apartments that now cannot be completed. To avoid social unrest, the assessment is that there will be some form of state-led solution where international investors will be forced to bear a larger share of the financial burden in order to protect private investors and consumers. From a market perspective, the big question is what kind of contagion effects a possible bankruptcy for Evergrande could cause, but at present the general perception seems to be that the authorities can manage a restructuring without major consequences for the financial system.
Electricity-, oil- and gas prices rose sharply during the month, partly as a result of higher demand, supply disruptions after Hurricane Ida and the transition to renewable energy sources creating greater unpredictability in energy production. The rise in energy prices is also causing inflationary pressure, and although the higher inflation may be of a temporary nature, there is some concern that a higher inflation rate will remain. The shortage of industrial components, such as semiconductors, continues to create problems for many companies while freight prices remain at high levels. All in all, this is dampening economic activity and is a source of concern. The United States is entering a new fiscal year on October 1, and at the last minute, American politicians decided on a temporary financing of government finances until December 3. However, the problems remain for President Biden and the White House as they have not yet been able to get their infrastructure- and welfare programmes approved by Congress.
The US Federal Reserve kept the Fed Funds rate unchanged at its Executive Board meeting and also announced that it will continue its purchases of securities worth $ 120 billion a month. At the same time, they indicated that they will soon reach a point when they can start to reduce their asset purchases. Right now, the main scenario is that there will be such an announcement in connection with the Fed meeting in November and that the plan is to terminate them in the middle of next year. Fed members also raised their individual interest rate forecasts and half of them now foresee an interest rate hike as early as 2022. Overall, communication from the Fed was interpreted as somewhat “hawkish”, which caused long-term bond yields to rise. In Europe, the ECB decided to reduce the size of its asset purchases from the fourth quarter of 2021. However, ECB Governor Christine Lagarde emphasized that this should not be seen as tapering and that the ECB has the opportunity to increase its purchases again, if the economic conditions would require it.
The credit markets were also affected by the increased uncertainty surrounding inflation and growth. This led to a slightly weaker development for bonds with longer maturities and for subordinated bonds issued by banks and insurance companies. However, the high yield market in the Nordic countries, Europe and the US was affected to a lesser extent as most companies continue to develop well. A very large deal was made in the Nordic real estate market when Heimstaden Bostad acquired Akelius’ portfolio of residential properties in Sweden, Germany and Denmark. The deal, which is worth SEK 92.5 billion, is one of the largest deals in the world so far this year and is in line with Heimstaden Bostad’s growth ambitions. Activity in the primary market was good, although a slight slowdown could be noticed towards the end of the month as many companies entered “quiet periods” ahead of their Q3-reports. Simplicity participated in new issues in the Danish solar- and wind power company, European Energy, the Mexican telecom company Total Play and the Swedish real estate company, Platzer.
Despite the fact that a certain volatility also impacted Simplicity’s funds, all ended the month in positive territory. Simplicity Likviditet increased 0.07% while Simplicity Företagsobligationer, Simplicity Global Corporate Bond and Simplicity High Yield rose 0.19%, 0.02% and 0.34% respectively.
Simplicity Likviditet
Performance YTD: 0.65%
Yield net of fees: 0.20-0.30%
Duration: 0.20 years
Maturity profile: 1.36 years
Simplicity Företagsobligationer
Performance YTD: 3.30 %
Yield net of fees: 1.50-1.60%
Duration: 1.15 years
Maturity profile: 3.22 years
Simplicity Global Corporate Bond
Performance YTD: 3.84%
Yield net of fees: 1.80-1.90%
Duration: 1.99 years
Maturity profile: 3.58 years
Simplicity High Yield
Performance YTD: 5.98%
Yield net of fees: 3.20-3.30%
Duration: 1.64 years
Maturity profile: 3.41 years
Equity Funds
Fund developments
The stock market mood soured during the month, and all equity funds ended the month in red. Falling prices and forecasts in the commodity market had a negative impact on the funds’ commodity companies, and we saw particularly large declines for forestry companies such as Holmen, Stora Enso, BillerudKorsnäs, UPM-Kymmene and SCA. Real estate companies also fell broadly, SBB the exception, and affected returns in Simplicity Norden and Simplicity Sverige, which are overweight in the sector. At the same time, the outlook for real estate companies looks brighter as the Swedish pandemic restrictions were largely lifted by the end of the month, and more people are now expected to return to offices and stores. Instead, top performers were the funds’ bank shares. Swedish conditions for continued growth look intact for the banks as the housing market is strong and the economy continues to move in the right direction. The sector was also top performer in Simplicity Småbolag Global’s portfolio, where US banks in particular rose on rising interest rates. The fund also benefited from recent portfolio changes as SPS Commerce, which was bought last month, rose 21% and the materials sector rose in the fund after forestry companies were sold during summer and fall in favor of chemical companies such as Hansol Chemical and Lotte Fine Chemical, both of which surged in September.
Stock of the month
Tegna owns and operates local TV channels around the United States. Their coverage is as much as 40% of American TV-audiences, while their segments are also available on digital platforms. The company mainly makes money from advertising and marketing. Often the customers of local companies that want to reach a wide audience in the nearby area. The company has managed to increase its sales by almost 50% since 2016 and is also very profitable. Last year, they had a return on equity of 26%. However, the fact that their product is of a more old-fashioned kind may be one reason for the companies low valuation, with a forward-looking P/E-ratio of 9,3. During the month, Tegna caught the attention of two private equity firms which presented separate bids for the business. During the month, the share rose by 14% and was one of the largest contributors in Simplicity Småbolag Global.
Global developments in brief
Continued supply chain problems, high energy prices, the delta variant and problems for companies to hire were behind increased concerns about slowing growth rates in the economy. In addition, China’s interventions against certain companies continued, while one of the country’s largest real estate developers, Evergrande, struggled with major liquidity problems. There are fears that a bankruptcy of the highly leveraged company could be the start of more in the world’s second-largest economy, which would also have a negative impact on global growth. Inflation remained high and in some parts of the world we saw hawkish turnarounds from central banks. For instance, Norges Bank raised the interest rate and more members of the Federal Reserve moved their forecast for when the next interest rate hike might be considered closer in time.