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Continued positive development in July

Both the equity and corporate bond markets continued their positive development in July. The fund also rose, by 3.64 percent. In the stock market, the strong development is mainly explained by large gains for a few shares. So far this year, the five largest shares in the S&P 500 have returned 35 percent, while the other 495 together show a negative development. We can see a similar pattern in Sweden, where Ericsson, Swedish Match and Evolution Gaming have lived their own lives and risen sharply. We avoid the latter two for reasons of sustainability (tobacco and gambling).

The Swedish krona has strengthened sharply, especially against the US dollar. This is probably a sign of increased risk appetite and greater demand, both in Sweden and globally. The stronger krona likely means that expectations will be lowered for the coming quarterly reports from Swedish export companies. The strengthening of the krona may also have been given an extra boost by the fact that the spread of the coronavirus has been significantly reduced in Sweden. However, the spread has gained momentum in many other places, including many American states, which probably opened up their communities too soon. It is reasonable to believe that it will take longer for societies and the economy to return to normal than we thought just a couple of months ago.

Company reports for the second quarter have so far generally met or exceeded market expectations, both in Sweden and abroad. At the industry level, the reactions in the more cyclical sectors have possibly been most positive, while the reports from companies with a more defensive focus have been received with a little less enthusiasm. If we look at the results components for Swedish companies at aggregate level, sales are slightly better than expected, +2 percent, while operating profit is just over 15 percent better. Since the lower costs are probably temporary – at least in part – the quality of earnings revisions will not be as high as if the positive deviation had been driven by higher sales.

“The quarter can therefore be seen as the first proof that Volvo is now better equipped to meet economic fluctuations than before.”

At company level, there were still examples of reports that surprised positively with good underlying quality, including the fund’s holdings in Volvo and ABB. Volvo reported higher-than-expected deliveries of trucks. It is also impressive that they managed to maintain a relatively good margin despite the extreme loss of sales. The operating margin amounted to just under 5 percent (around 3 percent adjusted for furloughing support received) despite a sales loss of 40 percent. The quarter can therefore be seen as the first proof that Volvo is now better equipped to meet economic fluctuations than before. The order situation also justifies some optimism in the future, even if the management chooses to take a cautious stance.

ABB’s report was generally better than expected. Above all, margins were higher due to good cost control (even taking into account the furloughing support received), and order intake and sales were also consistently better. Profitability was much better than expected for Robotics & Motion in particular, due to a recovery in China combined with a high margin in the order backlog invoiced during the quarter. Of course, it is also positive for the share that ABB started its repurchase programme after the report. The repurchases will cover up to 10 percent of the outstanding shares and will run until March 2021. The fund increased its holding in ABB during the month.

FastPartner is a new holding on the bond side, and entered the fund after a long discussion with the company and its banks. We envisage an attractive rating journey, with an IG rating in the foreseeable future (currently BB+). Verisure issued a new senior bond in which the fund invested, and which is now one of the fund’s largest bond holdings.

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