Portfolio Manager comment Coeli Likviditetsstrategi April 2020
Likviditetsstrategi advanced during April with 1.63 percent. Since year-end, the NAV per share has consequently decreased by 3.54 percent. In April, parts of the dramatic decline that occurred in the corporate bond market in the previous month were recovered. Credit spreads in both the investment grade and high yield segments tightened significantly, especially during the first two weeks while the end of the month offered more sideways development.
A large part of the positive development can be attributed to the return of liquidity in the market. Limited activity in the primary market and balanced fund flows have contributed to the stabilization. In addition, the extensive support measures from the central banks have made a positive contribution, both through the direct liquidity contributions and indirectly by strengthening investors’ risk appetite.
Therefore, the panic and total uncertainty that characterized the markets in March seems to be behind us. However, the credit spreads are still elevated; thus, the market is considering that in the coming quarters there will be more companies that will be forced to suspend payments or other types of credit events as a result of the global economic downturn.
Among the major contributors of the month were Stolt Nielsen and Ship Finance, whose bonds were sent about 30 percent and 20 percent higher respectively, both companies have bonds in the Norwegian market and were among the worst performing in the fund in March. Stillfront and Millicom also made significant return contributions as bonds from each rose by about 10 percent. The upturn for these two companies can be seen in the light of the fact that they are judged to be well-positioned, admittedly in widely differing industries, and can be expected to withstand a sharp deterioration in the economy relatively well.
On the negative side was mainly Danish Tryg Foriskring whose bonds were valued lower, without any trading reported on the exchange. Tryg presented its report for the first quarter and showed good growth and improved its technical result, but the last line was weighed down by a negative investment result. Bonds from the insurance company Sirius International were also traded down, since the end of March the company has been in a structured sales process. No concrete news on sales was presented during the month, an update is expected in connection with the report for the first quarter.
During the month, bonds were sold from Songa Container and Melin Group, both companies were considered to have a relatively low credit quality. The divestments were made to reduce the risk in the portfolio, given the impending economic downturn and tighter financing conditions. New investments were made in bonds from the measurement technology company Hexagon and the real estate companies Heimstaden Bostad and Balder. In addition, subordinated bonds from Vattenfall were added to the portfolio. The new investments could be made at what are considered to be attractive rates of return and contribute to increased diversification among the fund’s interest-bearing holdings.
The month of April was characterized by the Corona virus and its impact on the global economy. The International Monetary Fund (IMF) released new GDP forecasts with an expected contraction of 3.0 percent in 2020 and a recovery of 5.8 percent in 2021. The IMF also warns that the world may face a worse economic situation than during the financial crisis, due to the virus. The global loan-to-GDP ratio is expected to rise to around 85 percent in 2020, which is a significant increase from 69 percent at the end of 2019. For example, the U.S is expected to increase its loan-to-GDP ratio to 107 percent from 84 percent.
Following the rapid declines in March, the stock markets have recovered significantly in April with broad gains. S&P 500 was up 12.7 percent for the month, which was the best month since 1987. American unemployment rose dramatically, combined in March and April a total of approximately 30 million Americans filed for jobless claims. These massive numbers have taken unemployment to levels not seen since the depression in the 1930s. The Federal Reserve (FED) has announced, as Draghi did in the Euro area, that the central bank is willing to do “whatever it takes” to support economic growth. The Fed introduced a program to offer loans to companies, municipalities and states in the order of USD 2 300 billion. The US Congress also approved another aid package to support small businesses and widespread virus testing.
During the month, the ECB left interest rates unchanged but updated its criteria for asset purchases to include BB-rated credits. This update mainly relates to government bonds, but corporate bonds may also be included, given that a downgrade from the investment grade segment has taken place after April 7. The ECB has stated that it is ready to increase the size of its support purchases through its new PEPP program, which currently includes EUR 750 billion, in addition new loans will also be made to banks at negative interest rates. From the euro group meeting, an economic crisis package related to lending to companies of EUR 200 billion was announced during the month, as well as support for short-term work and healthcare costs, a further approximately EUR 340 billion.
In Sweden, there has been a growing debate whether the Riksbank should return to negative interest rates. However, the central bank left the policy rate at 0.0 percent, arguing that the downturn in the economy was driven by restrictions and concerns about the spread of the virus, rather than a financial downturn. Therefore, a lower interest rate would not achieve the desired effect; however, the Riksbank opens for interest rates to be lowered at a later stage during a recovery phase. The bank has also initiated its purchasing program of corporate certificates from non-financial corporations. Like the IMF, the National Institute of Economic Research has lowered its growth forecast to a GDP contraction of 3.2 percent in 2020 and an increase of 3.5 percent in 2021 for Sweden.
During the month, the European and Nordic credit markets showed falling credit spreads in both the high-yield segment and the investment grade segment. Stibor 3-month was noted at 0.29 percent, which is a slight decline from the month of March. The Swedish 10-year government bond was quoted at -0.13 percent at the end of the month and has thus risen 3 basis points during the month.
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DISCLAIMER. The information provided here does not constitute professional financial advice. Past performance is not a guarantee of future returns. The price of the investment may go up or down and an investor may not get back the amount originally invested. The key investor information document (KIID) and prospectus are available at www.coeli.se.