Portfolio Manager comment Coeli Likviditetsstrategi May 2020
Likviditetsstrategi advanced during May with 0.84 percent. Since year-end, the NAV per share has consequently decreased by 2.73 percent. The recovery in the corporate bond market continued in May; the initial two weeks resulted in development mostly sideways, while the second half of the month was characterized by significantly tighter credit spreads in both the investment grade and high yield segments.
Despite continued significant uncertainty about the economic consequences of the pandemic risky assets performed well, with gains for both equities and credits. Investors seem to rely on that more and more countries are beginning to ease up on restrictions and opening up for a restart of the economies. In addition, the sentiment was fueled by rising expectations of extensive fiscal policy measures and increased monetary policy stimulus in Europe.
Among the major contributors of the month was Ocean Yield that presented its quarterly report, the report was essentially in line with expectations. The company decided to reduce its dividend by almost three quarters in order to strengthen the balance sheet and secure liquidity. Ocean Yield’s earnings are backed by long-term leases where 68 of the company’s 72 vessels are contracted for an average of ten years remaining, but due to the rapid economic downturn counterparty risk has increased.
The telecom operator Millicom also contributed to the month’s results despite a quarterly report that came in weaker than expected. Along with the report it was announced that the company is withdrawing previous dividend proposals and cancelling the repurchase of own shares at the same time as a cost savings program is launched. The measures are considered positive from a credit perspective and are expected to contribute to improving the company’s financial strength.
The credit management company Intrum also made a significant return contribution. The company’s quarterly report showed reduced turnover and a lower operating profit, which is mainly explained by a negative revaluation of the company’s portfolio of overdue receivables. However, cash flow was strong and reported at a higher level than the corresponding quarter last year. The goal of achieving a leverage ratio in the interval 2.5 – 3.5 times the operating profit was moved forward by two years and is now expected to be fulfilled at the end of 2022.
On the negative side one mainly found Samhällsbyggnadsbolaget i Norden whose bonds came under pressure after S&P placed the company on the “Credit Watch Negative”, which indicates a high risk of downgrading. The action from S&P was motivated by concerns about the company’s ability to carry out previously planned property divestments after SBB’s CEO was suspected of violating the market abuse act. Later in the month it was reported that the preliminary investigation was closed and that the CEO was written off from the investigation.
During the month, the US Federal Reserve (Fed) started its already announced asset purchases in the corporate bond market. These purchases target bonds in the investment grade segment, but may also include so-called “fallen angels” – issuers which previously had an investment grade rating but recently been downgraded to the high yield segment. The purchases are made in ETFs through the fund manager Blackrock. US stock exchanges continued in a positive direction in May, the S&P 500 saw a 3.5 percent rise and Dow Jones a 3.0 percent rise.
ECB’s asset purchases have come into question as the Constitutional Court in Germany found that some of the asset purchases were in breach of German law. The European Commission responded that EU law is above national law and that the European Court’s ruling is binding on national courts as well. The ECB has until August to show that the purchases have been proportional, which is a requirement for the Germans. The European Commission has also released a proposal for continued support to Corona-affected countries, this time with a joint recovery fund totaling EUR 750 billion. During the month Eurostat released GDP figures for the first quarter of the Euro area. These showed a shrinking GDP of 3.2 percent for the whole region, France showed the worst development with a GDP decline of 5.8 percent compared to 2019.
The Swedish Riksbank has, just like the Fed, hired Blackrock for the eventual asset purchases of corporate bonds, with Blackrock acting as an external consultant. In the assignment, an analysis of the Swedish corporate bond market will be conducted as well as evaluate alternatives to the design of a program for the purchase of corporate bonds. CPIF inflation in Sweden showed a decline of -0.4 percent in April, which is clearly below the Riksbank’s expectations.
During the month, the Norwegian central bank unexpectedly lowered the policy rate to zero, pointing out that low interest rates can help dampen the economic downturn the country has suffered since both the oil and Corona crisis started.
The European and Nordic credit markets showed falling credit spreads during May, in both the high-yield segment and the investment grade segment. Stibor 3-month was noted at 0.18 percent, which is 11 basis points lower than end of April. The Swedish 10-year government bond was quoted at -0.05 percent at the end of the month and has thus risen 8 basis points during the month.
|Performance in Share Class Currency||1 Mth||YTD||3 yrs||Since incep|
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.