Blecher: “Experience suggests that the market turns before the economy”

A global financial crisis that cannot be halted. The Covid-19 crisis is unique, and is fundamentally changing many parts of our society. But we are long-term owners of well-managed companies, and sooner or later we will get through this too,” says Simon Blecher, manager of Carnegie Sverigefond and Carnegie Spin-Off.

Simon Blecher

“Share price movements can be crazy during a financial crisis. Companies can go down 10-15 percent in a day, and for no reason. But previous stock market crashes have taught us two things. Firstly, movements are always too fast and too far, and that can be seen in retrospect. And secondly, the market turns before the economy,” says Simon Blecher.

So when can we expect an end to the coronavirus crisis?

“It is obviously impossible to say. But I think that once the virus peaks in Italy and starts to decline the market will finally be able to find its footing. In Sweden, we have seen measures such as support packages from the Riksbank, and a scrapping of mortgage repayment requirements and the period of unpaid sick leave, in order to calm the markets. This is good, and a step in the right direction, but much, much more stimulus is needed from both politicians and central banks.”

“Expect airlines to be nationalised and for us all to be talking about life before and after the virus.”

“So my hope is that we will start seeing effects in two or three weeks. And once we get beyond this crash, people will continue to buy cars, renovate their kitchens and start going to restaurants again, but we must also be prepared for major changes. We will all have to adjust our attitude. Around 10 percent of the world’s GDP will be as good as lost, not least as the global tourist industry is realigned. Expect airlines to be nationalised and for us all to be talking about life before and after the virus.”

What action are you taking within the funds?

“Generally speaking, many Swedish companies are cheap, and just as many companies have fallen unjustifiably far. But it is important to point out that both Carnegie Sverigefond and Carnegie Spin-Off are liquid funds, and we are comfortable with owning prudent value companies.”

“We know these companies, we understand what they do, we have good liquidity and we have cash in all the portfolios. And when the wheels start turning again, it is important that we continue to own good companies with low debt, which is our basic philosophy. Holmen owns a large part of Sweden’s forest, Investor owns a combined portfolio with Wallenberg as its principal owner, Volvo is at the top of trucks worldwide and has large cash reserves.”

“We know these companies, we understand what they do, we have good liquidity and we have cash in all the portfolios.”

“Looking back to 2008–2009, Volvo had a negative order intake and we were in a position where we did not expect there to be money in the ATMs. There are certainly many people who remember that. But do not forget that the stock market has an ability to lead the way in both directions. The market goes down before the economy, and it goes up before the economy.”

Can you name any holdings that have had a tough time?

“Many, of course. One holding is Electrolux, despite not having any big debts. It is planning to spin off Electrolux Professionals, which has manufacturing in Italy and sells to restaurants… so, clearly that is not good. The current valuation of Electrolux is in line with what it was at the time of the Lehman crash. Its main shareholder is Investor, but the company could certainly fall further in the short term.”

Do you think the spin-off of Professionals will be delayed?

“It’s probably too late. Professionals could have a really tough time, but perhaps another buyer will step in or place a bid. We just don’t know.”

Many dividends have been cancelled. What is your feeling about that?

“What we know so far has come from companies like Pandox and Scandic, but this could also happen with some of our companies. If it happens, remember that the money is still there. The dividends are being postponed in order to maintain cash reserves at a time when the credit markets are not what they should be. But that does not mean the companies have burnt up the money. The market will be very forgiving for Q2. One lesson from 2008 is that when the losses came, company shares rose because everybody already expected them.”

Simon has a picture he uses when the market is tough, and he last looked at it in 2008. It starts with optimism that turns into euphoria when everything feels great. But then something happens. Perhaps one sector is rattled and you choose to deny it. Right now, we are somewhere between panic and capitulation.

How do things look for the rest of the year?

“Losing two quarters is not the end of the world in the long term. It is more important that the autumn and 2021 are not hit too hard. It will probably turn out that anyone who bought shares in the spring of 2020 got a reasonable deal in a few years’ time. And above all, I hope we will soon be feeling hope, relief and optimism again,” says Simon.