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Risk appetite allows primary market to open up

Global financial markets continue to indicate a relatively rapid recovery for the world economy. Stimulus, support and the lack of alternatives are causing global stock markets to touch record highs while news of the virus spreading again is causing them to shudder.

As country after country eases restrictions, the focus is on reopening while the virus has forced new quarantine measures in several parts of the US. Despite the concerns, markets simply expect the impact to be isolated after Q2, or for central banks to be ready with the printing presses to rescue investors. We therefore also expect the recovery to continue despite a spread of the virus in some places.

“The discrepancy between the rating segments has somewhat diminished as transactions in the primary market provide new references for the price of risk.”

The stronger risk appetite has allowed the primary market to cautiously open up, in both investment grade and high yield, with issues from names like TietoEvry, Statnett, Bulk Industrier and Cibus. The discrepancy between the rating segments has somewhat diminished as transactions in the primary market provide new references for the price of risk. Although we are seeing some roll-over from names that have already recaptured most of the March losses, there are still some differences between sectors and specific names in some areas.

Investment grade is primarily about mortgage credits, which continue to pay well compared to other sectors. As more real estate companies issue, the curves gradually begin to tighten and bond prices rise, but we believe there is potential left so we have an increased exposure to primarily residential and community properties.

The recovery has been delayed in the high yield segment, except for names considered corona resistant. But we are now beginning to see signs that even more peripheral high yield names are recovering parts of the losses. This is partly because investors are forced out along the risk scale as high-quality names no longer look as attractive compared to others. The lack of new material should also have a similar effect in pushing prices progressively higher as current coupons and maturities must be reinvested.

The fund’s focus on the entire risk scale contributed to the strong return of 2.92 percent during the month, which takes this year’s decline to -5.95 percent.

Last year, we saw very good risk appetite and strong fund inflows pushing credit margins down to record lows. The progress of the coronavirus is creating great uncertainty, and although we have seen some recovery, the credit margins remain at attractive levels. However, we maintain our conservative approach with a balanced and diversified portfolio focusing on liquidity. We continue to focus on sustainable companies, which we are convinced will contribute to the long-term return.

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