Important characteristics going forward: Long-term stance and patience
Events in March were about nothing other than the global spread of the coronavirus and its impact on both the real economy and risk sentiment. The effects of this have far exceeded early fears, leading both central banks and governments to roll up their sleeves and introduce extensive support packages, interest rate cuts and various stimulus measures.
Thanks to these, and after dramatic tumbles for all classes of risk asset earlier in the month, risk appetite is now slightly improved and there have been tentative but broad stock market gains.
After substantial price declines in the credit market, driven mainly by the lack of liquidity, we are now seeing some stabilisation, and price levels have risen somewhat and liquidity is now judged to be slightly better than earlier in the month. The Norwegian government’s crisis fund for credit purchases of NOK 50 billion, half of which can be used for purchases of high yield credits, and the Riksbank’s expected support purchases of credits should provide further balance to the credit market going forward.
Despite cautious price increases, bond prices are still at historically low levels, making many credits look extremely attractive in terms of yields. In this market, levels of 10–15 percent are quite suddenly reasonable for quality companies, compared to the previous 4–7 percent.
The main focus during the month has been to maintain a liquid portfolio and sufficient cash to meet the fund’s flows by a good margin.
Given current price levels, there are good opportunities to make long-term attractive investments, and this is also revealed by the fund’s current underlying coupon return, which is as much as 15,8 percent. Important characteristics going forward will be a long-term stance and patience since the journey back may be slow and edged by volatility. At the same time, we expect the majority of holdings to recover from the current large price declines in the long run and redeem the entire bond, while at the same time receiving relatively high coupon payments along the way.
The spread of the virus and its impact on the general risk sentiment led the fund to decline 18.39 percent in March, making the return so far this year -17.93 percent.