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Raring to go

After 2 months of corona worries, global markets rose sharply in May on news that several countries were gradually easing restrictions and beginning a comeback as infection curves flatten out at low levels. Risk assets rose broadly and oil had its strongest month ever, albeit from low levels, after central banks continued to do whatever it takes.

The trade conflict escalated when China voted through a new security law, but markets are expecting Trump to stay in check until the autumn election. Concerns about the virus and a recession have been replaced by a fear of missing out, and it is clear that much of the money that initially disappeared is waiting impatiently on the side-lines.

“At present, we can see a large discrepancy in the recovery between investment grade and high yield”

Risk sentiment is still strongly influenced by flows. The steep falls were initially triggered by an acute need for liquidity, and the market sold risk assets broadly. As the flows levelled out, names regarded as corona-resistant, including Stillfront, ICA and Sinch, started to trade up. At present, we can see a large discrepancy in the recovery between investment grade and high yield, with many high yield names continuing to trade at relatively low levels since few investors are willing to pay for risk.

We were active in May and increased our exposure to holdings with higher credit ratings, and primarily names traded with a relatively strong discount. These particularly include cyclical and strong engineering companies such as AB Volvo and some longer real estate credits that have not yet recovered in price but should do over time. These credits not only have a potential price increase, but the current coupon return is also considered to be very attractive for this type of low-debt quality company. It is worth repeating that this is a marathon and not a sprint, which is why we will probably see a gradual recovery of performance over a longer period as communities open up and learn to deal with the virus.

Despite a slightly more defensive portfolio with a historically high exposure to investment grade of 54% and selective price recovery, Carnegie Corporate Bond rose by 1.19 percent in May, thus summing the year’s decline to -8.62 percent.

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