Another strong credit month
December was relatively eventful from both global and local perspectives, with broad purchasing manager indices ticking upward and the US and China seeming to have come a long way in their trade negotiations through the “phase 1” agreement. In addition, Johnson gained a majority in the British election, which means less uncertainty and sets the stage for Brexit.
At the risk of sounding like a broken record, December also delivered a strong market with good risk appetite. Equities recorded new record highs and credit margins continued to fall. At the beginning of the month, the primary market continued its high pace, but activity slowly began to recede in the week before Christmas, and made time for much needed reflection on the past year and thoughts on expectations for 2020.
The first half of December was in line with the pace of the autumn and offered a number of issues from both well-known and new names. We participated in new issues from, among others, Finnish Ahlström-Munksjö, which produces innovative fibre-based products, Norwegian Cegal, which offers cloud-based technology mainly for the oil industry, and Assemblin, which provides installation and services in the Nordics. We also participated in the refinancing of Cabonline’s bond, with the market demanding both a better price and better bond terms than before as the company has not performed as expected.
We closed both December and 2019 with attractive gains of 0.32 percent and 4.12 percent, respectively.
Performance in 2019 beat expectations, driven by high risk appetite matched with good fund inflows, which together pushed down credit margins. In addition to the positive market sentiment, a large part of the fund’s return was influenced by improvement in credit quality for most holdings during the year.
Given large price increases on credits in 2019, we believe that the return in 2020 should be expected to come from underlying coupons rather than continued falling credit margins.