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Likviditetsstrategi declined during October with 0.12 percent. Since year-end, the NAV per share has consequently increased by 1.00 percent. The corporate bond market was supported by the companies' reports for the third quarter, which in general lived up to investor expectations. However, the reports reflect the signals of a gloomier economic development; hence, the forecasts for the coming quarters are more restrained. The credit spreads for high yield issuers were somewhat tighter, while the more creditworthy investment grade companies noted a more marked tightening. Rising European government bond yields, with marked increased yields in Swedish government bonds, brought pressure on fixed-rate bonds.
Among the month's major positive contributors was Telia, which developed well after the company's report showed a certain decline in service revenue, adjusted for acquisitions, and an operating profit that was somewhat stronger than expected. From a credit perspective, it is noted that cash flow improved significantly at the same time as the company announced that the repurchase of shares would be terminated in advance. Hexagon Composites also made a significant return contribution after guiding on improved prospects within fuel systems for transit buses and trucks.
On the negative side one mainly found the Norwegian payment service company Melin Group, whose bonds fell sharply after two trades were cleared at unexpectedly low prices. The rapid fall in prices is seen as an expression of the limited liquidity that arises from time to time in the corporate bond market. At the end of the month, the company held an update with investors, where management repeated that the underlying development is generally satisfactory but that the financial results are materializing slower than anticipated. The operating profit for 2019 is expected to improve somewhat compared with the previous year. Given the current earnings, the company is heavily indebted; however, cost synergies and expected increased revenues from acquired operations in Sweden provide conditions for the company to be able to improve the financial metrics next year.
Samhällsbyggnadsbolaget i Norden was another negative contributor as its bonds were sent lower despite a strong quarterly report. In October, the company repurchased subordinated bonds with a significant premium, while new subordinated bonds were issued. The refinancing will help to lower interest costs further and is an important step towards the company's ambition to achieve a higher credit rating.
During the month, the entire holding of bonds from Stora Enso was divested at the same time as exposure to consulting company ÅF Pöyry was reduced, both sales aimed at reducing the proportion of cyclical companies. In addition, the holding of subordinated bonds from Länsförsäkringar Bank were divested.
The fund participated in the new issue from the Samhällsbyggnadsbolaget, which now constitutes the largest issuer among the fund's holdings. In addition, the holdings of bonds from the telecom company Millicom and the insurance company Gjensidige were increased. These investments are considered to fit well in the current economic environment and contributes to increased risk diversification.
As in September, Federal Reserve (Fed) chose to lower its benchmark interest rate by 25 basis points in October. Fed’s benchmark rate interval is now 1.5-1.75 percent. Jerome Powell, chairman of the Fed, highlighted that the current monetary policy is appropriate for continued economic expansion. The international risk environment has improved somewhat as U.S and China trade negotiations are moving along, as well as the risk for a hard Brexit has declined. Thus, Powell is trying to inform the market that this is most likely the last rate cut for a period of time. Moreover, third quarter figures for the US GDP development was released and the figures showed a growth rate of 1.9 percent, which is above analysts’ estimate of 1.6 percent.
In Europe, Mario Draghi was replaced as Chairman of the European Central Bank (ECB), by the previous head of the IMF, Christine Lagarde. The ECB chose to leave interest rates unchanged and repeated the mantra that the bank does not intend to raise interest rates until inflation converges to the inflation target of 2.0 percent.
October was also the month Great Britain was supposed to leave the European Union, with or without a deal. Though, negotiations between EU and the UK Prime Minister Boris Johnson led to an updated deal, which was to be voted on in the British Parliament. However, the proposal was rejected, and the Parliament subsequently decided that the UK should apply for another extension. At the end of the month, the member states of EU voted in favor of pushing the deadline to 31st of January. Boris Johnson responded to Parliament's vote calling for a general election, which will take place on 12th of December. The Tories, led by Boris Johnson, are in the lead in several election surveys. Thus, there seems to be a few more turns of discussion before the UK leaves the European Union.
The Swedish central bank (Riksbanken) left the repo rate unchanged during its October meeting and at the same time announced that it is likely to be raised to 0.0 percent in December. The Riksbank is of the opinion that although the economic forecasts are slightly revised down, they do not give the picture of a recession, internationally nor in Sweden, and that the inflation rate has been close to the inflation target since 2017. At the same time as the Riksbank left the repo rate unchanged, it lowered the forecast on the development of the repo rate, where it now foresees a repo rate of 0,0 percent until 2022.
During the month, the Nordic and European credit markets had falling credit spreads in both the investment grade and the high-yield segment. Stibor 3-month was noted at -0.02 percent at the end of the month, after being below 0.0 percent throughout October. 10-year government bonds showed a negative trend with higher yields and the UK's 10-year government bond stood out most with a rise of 20 basis points. The Swedish 10-year government bond is now approaching 0.0 percent in yield and was noted at -0.11 percent at the end of the month – an increase of 18 basis points during the month.
Portfolio Manager of Coeli Likviditetsstrategi
Senior Analyst
| Inception Date | 2010-05-01 |
| Management Fee | 0 % |
| Performance Fee | Yes |
| Risk category | 1 of 7 |
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.