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Volatile equity markets in September

September was volatile for stock markets, with global equity indices falling 3–5 percent. Global credit markets were more mixed. Indications of a reduction in support purchases, hawkish signals and varied communication about the “temporary” inflationary impact caused long-term market interest rates to rise sharply.

European liquidity and high-beta names were weak, while Nordic spreads narrowed somewhat as there was continued high pressure in the market. Although the turbulence surrounding China Evergrande is having a short-term impact, there are multiple buying opportunities for the long-term investor as the underlying risk appetite continues to lean towards arguments like TINA.

September was initially an extension of the previous month’s strong new issue market. But, in typical seasonal fashion, activity is returning to some form of normal, although it is noticeable that investors are willing after the summer to take full advantage of buying positions when the right company issues.

On the corporate front, Humble has announced new acquisitions. The more transformative acquisition of Solent Group gives the company a broader product portfolio in FMCG and a distribution network in the UK and Asia. The group has a pro forma turnover of 3.2 billion, with an operating margin of about 13 percent. The acquisition is being financed mainly by shareholders, causing debt to fall to 2.5x (excluding future payments for acquisitions). We participated in the issue, and the company raised money at about 7 percent.

We financed this by selling Mutares and Fiven, which after the summer’s strong market are traded below the fund’s required return of about 6 percent and therefore have to make room for exciting new holdings. Scan Global is one such name. It finances new acquisitions with new subordinated debt, and we get the opportunity to rotate from the senior debt as the price becomes more expensive. Although the position is somewhat large at certain data points, it should over time approach the target weight of about 5 percent.

We continue to view the Nordic credit market positively. We are optimistic in the short and medium term of being able to create a certain excess return from company-specific factors in addition to coupons, in order to have longer-term expectations in line with the underlying rate of return in the portfolio.

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