Portfolio Managers comments
September was an unusually eventful month in many different areas as markets focused on increased risks and worsening economic conditions. In Sweden, parliamentary elections were held, which resulted in a narrow victory for a right wing coalition consisting of four parties. However, the forming of a government seems to be complicated process and at the time of writing no government alternative has been presented and thus no prime minister has yet been elected by the Swedish parliament. As usual, domestic Swedish political development did not have any major impact on the markets. In the UK, the newly appointed Prime Minister, Liz Truss, presented a comprehensive reform package containing major tax cuts. The proposal was not well received as investors fear that the proposals will fuel the already record high inflation. The yield on British government bonds rose sharply and the pound plummeted on the back of the news. However, markets rebounded somewhat after Bank of England announced that they will start a temporary asset purchase program and that they would postpone some of their previously announced monetary policy tightening measures. Europe is currently suffering from very high energy prices, which weigh on corporate results and reduce household purchasing power. Natural gas prices rose following the news about the leaks on the natural gas pipelines, Nordstream 1 and Nordstream 2. The leaks were caused by explosions, allegedly intentional sabotage, and have effectively stopped all transport of gas from Russia to Germany. In Sweden, the situation for electricity prices worsened as Vattenfall announced that the restart of the nuclear reactor, Ringhals 4, which has been closed since the end of August, has been further delayed.
A number of central banks raised their policy rates in September as part of efforts to fight back inflation. In Europe, the ECB hiked by 75 basis points while stressing that measures of this magnitude should not be seen as normal and that the level of future interest rate changes will be determined by incoming data. European interest rates rose as a consequence of the decision. The US central bank, Fed, also raised interest rates by 75 basis points, which was in line with market expectations. The Fed members also raised their so-called “dot-plots” that indicate what they think about the future policy rate, something that shows that they believe in a higher Fed Funds rate than previously indicated. In Sweden, the Riksbank raised its key interest rate by 100 basis points, which was higher than analysts’ expectations but in line with market pricing. Despite this, Swedish government bond yields rose after the decision, which also caused a lot of attention in both Swedish and international media. In conjunction with the decision, the retiring president of the Riksbank, Stefan Ingves, highlighted the importance of acting quickly and forcefully now instead of ending up behind the curve and being forced to do more in the future. In the minutes from the executive board meeting published at the end of the month, it appeared that even though the interest rate decision was unanimous, opinions about the future monetary policy varied somewhat among the members of the board.
In the credit market the development was also characterized by weak performance and high volatility. The credit spreads for High Yield companies are in many cases trading above 600 bps, which is to be added on top of a fixed or floating reference rate. In the Swedish market, the most common reference rate for FRNs, three-month Stibor, is currently trading around 1.75% and this means that the interest rate on High Yield bonds often ends up at 8% and above, which in turn affects the pricing of new issues. This means primary markets activity has decreased as many companies think that market financing is too expensive and seek other sources of financing instead. The real estate company Corem announced that it intended to buy back two outstanding bonds and to finance the buyback with a new bond. After they announced their plans, the market weakened sharply, causing them to withdraw both the new issue and the buyback offer. The announcement affected both share- and bond prices negatively. The debt collection company Intrum issued a profit warning due to negative adjustments of the value of an Italian asset portfolio. The measure is not expected to have any effects on either cash flow or credit ratios in the short term. It should also be considered that the company’s CEO was fired recently, but it still raises questions about the quality of the company’s assets and over the industry as a whole. The gaming company Stillfront announced that they have secured a new credit facility with Swedish Export Credit, SEK, and that the capital raised will be used to repay an outstanding bond, something that was well received by the market.
Although activity was low, we participated in a number of new issues from SKF, Telia and Nordea, among others. The yields have continued to rise in all funds, and even though this has had a negative impact on returns this year, we believe that it creates a good basis for generating returns going forward. In Simplicity Global Corporate Bond, which has an international focus, we have increased the interest duration slightly since long-term US rates have risen to levels where we consider it justified to take some duration risk.
Against the backdrop of rising interest rates and credit spreads, all funds showed a weak development during the month. Simplicity Likviditet decreased by 0.08%, while Simplicity Corporate Bonds, Simplicity High Yield and Simplicity Global Corporate Bond fell by 1.71%, 2.24%, and 3.58%.
Performance YTD: -0.46%
Duration: 0.20 years
Maturity profile: 1.06 years
Performance YTD: -6.74 %
Duration: 0.82 years
Maturity profile: 3.13 years
Simplicity Global Corporate Bond
Performance YTD: -10.68%
Duration: 2.14 years
Maturity profile: 3.12 years
Simplicity High Yield
Performance YTD: -7.07%
Duration: 1.05 years
Maturity profile: 2.87 years
September continued on the set path for the year with another challenging month. Again, the inflation rate was higher than expected, the central banks more hawkish and the threat from Russia grew.
The risk appetite and sentiment deteriorated, as confirmed by Konjunkturinstitutet’s household confidence indicator. During the month, the indicator was measured for the first time ever below 50, compared with 73.1 during the financial crisis and 78.0 during the pandemic. The fact that consumers are clinging to their money ever tighter also seems to be noticeable among companies to an increasing extent. During the month, several profit warnings came based on reduced demand both among Swedish companies and abroad. At home, for example, NCC, Intrum, Mips and Electrolux issued warnings. Abroad, warnings were noted from FedEx, Saga, Boohoo, Ford, EDF and Next, among others. Simplicity’s home market funds, Simplicity Norden, Simplicity Sverige and Simplicity Småbolag Sverige, still performed relatively well during the month and the investments had a limited impact through smaller holdings in Intrum and Electrolux.
In Norway, a tax raise for salmon farming was proposed and caused a steep fall for the country’s listed salmon farmers which mainly affected Simplicity Norden. At the same time, it was proposed to increase taxes on wind power and hydropower, which caused Cloudberry Clean Energy, holding in Simplicity Green Impact, to be valued down. Axfood also received a lower valuation after the risk of margin pressure caused the analysts to lower its recommendations for the share found in Simplicity Norden, Simplicity Sverige, Simplicity Småbolag Sverige and Simplicity Småbolag Global.
However, the banks and insurance companies of the funds liked the rising interest rate environment and performed clearly better than the market. In the home market funds, Handelsbanken, Ringkjoebing Landbobank, Swedbank and Spar Nord Bank prevailed with rising prices, and Simplicity Småbolag Global also benefited from overweight in the sector. Game developer Paradox, holding in Simplicity Sverige and Simplicity Småbolag Sverige, rose during the month after new product releases were well received. Pfizer, holdings in Simplicity Norden and Simplicity Sverige, also developed stably and rose during the month. Real estate shares were further valued down as interest rates rose, while Corem’s cancellation of bond buybacks negatively affected the sector which fell broadly. The stock market now values real estate companies at about half as much as at the beginning of the year.
With one quarter left of the year, the Stockholm Stock Exchange has so far its worst year since 2002. Clearly, there are opportunities for returns even during these periods as 44 of the stock exchange’s around 400 companies are on the plus side this year. With sentiment at the bottom, the classic saying is brought to mind: Be fearful when others are greedy and greedy when others are fearful. Valuations in Europe are now at a 10 year low.
Stock of the month
… is not a stock but our own fund Simplicity Norden. On September 23, our flagship turned 20 years old! The fund has been managed by Ulf Ingemarson since the start through eventful years with both large ups and downs on the stock exchanges. The total return during the period was 848%, while the fund’s benchmark index Stoxx Nordic Total Market Total Return Index was up 607% in the same period. The highest return recorded on a single day is +6.91%, which occurred on May 23, 2006. A feather in our hat was of course when Simplicity Norden was named Best Nordic Equity Fund at the Morningstar Fund Awards 2019.
We would like to take this opportunity to thank customers, partners, colleagues and everyone else who has given us their trust during these 20 years. We look forward to at least 20 years more!
Global developments in brief
Inflation kept coming in above forecasts around the world. Given the length and level of price increases, it is now difficult to imagine anything other than future wage increases well above the central banks’ inflation targets, which in turn can lead to more persistent inflation.
The central banks’ announcements during the month were also very clear. The fight against inflation comes first and increases will be made for as long as they are needed.
Switzerland left the negative interest rate and, like the ECB and the Fed, raised by 75 basis points. Norway and the United Kingdom raised by 50, while the Riksbank raised by 100 basis points. The record-high rate hike was still not enough to prevent the Swedish krona from weakening further. The exchange rate will probably be closely monitored by the Governors of the Riksbank in the future. Bigger problems, however, were found at britain’s central bank, BoE, which this month began to support long-term government bonds to support the pound as it fell when the new government under Liz Truss put forward a package of unfunded tax cuts.
After continued setbacks in Ukraine, Russia renewed its nuclear weapon threat and began mobilizing reservists. The Kremlin’s desperation led many to conclude that Russia is behind the blasting of Nord Stream 2 at the end of the month but it still remains for investigators to find out who is responsible. The sabotage is difficult to rationalize about as few have obvious gain out of it. Shortly after the sabotage, the U.S. asked its citizens to leave Russia while there are still flights out of the country.
Simplicity Småbolag Global and Simplicity Green Impact fell 6.9% and 6.2% respectively. Simplicity Norden fell 9.2% together with Simplicity Sverige and Simplicity Småbolag Sverige, which ended the month with declines of 7.7% and 11.9%, respectively. Simplicity Fastigheter followed the decline with 20.5%.
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