Corporate credit is more attractive

Thomas Elofsson and Stefan Wigstrand have been engaged for just over a month with adjusting the funds they now manage to their own preferences, but the external environment naturally sets the framework. Global growth is relatively low, even though the central banks of many countries are pursuing almost uniquely expansionary monetary policy, with very low interest rates, zero interest or – in the case of Sweden – negative rates.

The globalisation that has dominated around the world since the 1990s continues relentlessly to depress inflation. This allows, or rather compels, the Riksbank to continue with stimulus measures. Although it is difficult to measure, the development of technology is also contributing to the trend; the internet facilitates both knowledge transfer and trade, and electronics are constantly getting better and cheaper.

In Sweden, last year's strong population growth due to the wave of migration has slowed, which indirectly means that growth will also have a somewhat slower pace. Meanwhile, debt continues to increase.

"Individuals and businesses have borrowed ever more, and total debt in relation to GDP is now higher than in 2008. This will become apparent in future growth. As long as central banks pursue their super-expansionary monetary policy, market volatility will remain artificially low. However, lower growth and higher debt creates fertile ground for rapid and large movements when unexpected negative events occur – this year there have been serious concerns about the European banking system, with question marks over Deutsche Bank," says Thomas Elofsson.

Government bonds are not an option in the current environment. This has instead made corporate debt a little more interesting since it can still offer some returns. According to the portfolio managers, corporate bonds can be expected to perform relatively well in most scenarios, but with the exception of a recession, which could hit this type of asset. In recent years, global growth has been fairly constant at around 3 percent, with the help of China, while the West has been sluggish.

Commodities, particularly oil, have been very important for the world economy. There was also recently a long-awaited decision by the OPEC cartel, when its members agreed on production cuts for the first time in several years. The question, however, is which countries will reduce their production and how sustained any price increase may be.

"When we look at who is going to cut their production, nobody is really enthusiastic. And if the price of oil rises substantially there is likely to be much more available from fracking. They do not want to let prices go too high in case they lose market share," says Thomas Elofsson.

The market for higher-paying high-yield bonds is very much about Norway and the oil services industry. And the price of oil remains the key – if it rises, many troubled companies are likely to rapidly achieve better cash flow and survive, otherwise there is a danger of defaults. This latter outcome is also the greatest fear of the banks since they have the largest exposure to these companies and are therefore also indirectly dependent on oil prices.

"Most of the Norwegian high-yield market is in some form of restructuring, with the problems being kicked into the long grass. But rigs in the North Sea require a fairly high oil price, and we are quite far from those levels," says Stefan Wigstrand.

Outside the oil sector, many large Swedish industrial companies have found it difficult to show any profit growth, while small caps and services have performed much better. This development is also relevant to the fixed-income market since services do not require capital to the same extent as industry, which means less choice of corporate bonds.

"We hope to see more corporate transactions that require funding, and where we can play a role," continues Stefan Wigstrand.

Selling pressure has started to become apparent in US government securities. If this becomes the case in Sweden as well, Thomas Elofsson says it will be because of the finance minister's desire to spend.

"If Magdalena Anderssson starts to borrow more, increasing the supply, risk premiums will have to be taken. So long-term interest rates are not a particularly good investment over the longer term," he says.

If the Riksbank reduces its stimulus, this would be likely to have an impact on market interest rates, but the question is how much. Thomas Elofsson believes the potential impact is nonetheless limited.

"A percentage point certainly, but not much more than that. Then, of course, inflation may gain momentum, and that is something else entirely."

With regard to changes in interest rates, the fixed-income managers believe the US Federal Reserve will probably raise rates in December. In Sweden, however, adjustments are not likely to be imminent.

"Firstly they have to stop buying assets, then they can start to think about upping rates. What they should do is a different matter, because this is not healthy. But for the Riksbank, it is a reasonable probability that it will stop buying so many assets," says Thomas Elofsson.

When it comes to the expected returns for Catella's funds, Stefan Wigstrand says that these vary from 1.5 percent to just over 6 percent, with the Avkastningsfond, with its focus on low-risk bonds, at the bottom and Credit Opportunity, with a large proportion of high-yield bonds and substantial discretion for the managers, at the top.

"We are striving to make Avkastningsfond into an 'anchor', with a gross return of up to 1.5 percent before fees. For Corporate Bond Flex we can probably expect a level of returns around 3-3.5 percent gross, and for Credit Opportunity north of 6 percent, in the current market," says Stefan Wigstrand.

Among the specific changes made so far, the managers mention adjusted sector selection, with a lower proportion placed in the financial sector where the bias has previously been a little heavy. In addition, the portfolio has taken on more liquid assets so that attractive investment opportunities can be utilised.

"We will probably increase the risk in the individual investments in some cases. But by spreading them across more sectors, and in some cases more holdings, we can eliminate much of this risk. Then we have the cyclical component, where we invest when there is a favourable situation. This means we can add to the returns over and above the basic portfolio," says Stefan Wigstrand.

Important Information
Investments in fund units are associated with risk. Past performance is no guarantee of future returns. The money invested in a fund can increase and decrease in value and it is not certain that you will get back the full amount invested. No consideration is given to inflation. The Catella Balanserad, Catella Credit Opportunity and Catella Hedgefond funds are special funds under the Swedish Alternative Investment Fund Managers Act (SFS 2013:561) (AIFM). Catella Reavinstfond and Catella Småbolagsfond may use derivatives, and the value of the funds may vary significantly over time. The value of Catella Sverige Index may vary significantly over time. Catella Avkastningsfond may use derivatives and may have a larger proportion of the fund invested in bonds and other debt instruments issued by individual national and local authorities and within the EEA than other mutual funds, in accordance with Chapter 5, Article 8 of the Swedish Investment Funds Act (SFS 2004:46). Catella Nordic Long Short Equity and Catella Nordic Corporate Bond Flex may use derivatives and may have a greater proportion of the funds invested in bonds and other debt instruments issued by individual national and local authorities and within the EEA than other mutual funds. For more details, complete prospectuses, key investor information, and annual and half-yearly reports, please refer to our website at catella.se/fonder or phone +46 8 614 25 00.