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Still good cash flow

After two weeks of rigorous measures to prevent the spread of contagion, sharp stock market declines, government rescue packages and interest rate cuts from central banks, we are probably just barely into this crisis. Naturally, the stock and fixed income markets are strongly affected. Below Storebrand's Equity and Fixed Income teams summarize the events of the last week.

Published 27.03.2020 by Caroline Sesvold Tørring

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UP: The Oslo Stock Exchange is up 8 percent from the bottom (Thursday, March 26). However, the fluctuations in individual stocks are large. Photo: Oslo Børs.

Naturally, there is still great uncertainty in the market and this will continue in the near future.

– The market is still characterized by volatility and uncertainty. Several companies are revising their expectations for Q2 2020, and more are dropping their dividend plans. There is still an increase in the number of persons infected by Covid–19 globally, says Bård Bringedal, head of equities at Storebrand Asset Management.

Still good cash flow

  
The past week saw stock markets actually rise, and the Oslo Stock Exchange is, for example, up 8 percent from the bottom (Thursday, March 26). However, volatility, and associated fluctuations in single stocks, are large.

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Bård Bringedal, head of equity management.

–  Sentiment in the market is more nuanced than in previous weeks, and we see investors using the market decline to buy into companies that have fallen more than the fundamentals would indicate. We have succeeded in our Norwegian equity positioning throughout this period, whereas some of our international funds, especially those with an exposure to smaller companies or value companies, have had a challenging time. Throughout this period liquidity in the market remains very good, allowing us to handle the increased customer activity we see in our funds efficiently, says Bringedal.

Euphoria and panic

  
Bringedal points out that for their active mandates, the equity team uses market opportunities to adapt its active positions.

 – Such is the market today, with the rapid swings between euphoria and panic, that there are several opportunities for active management which we want to exploit.

The market will probably still be characterized by greater fluctuations than usual in the time to come. An important driver for the market, of course, will be how the spread of the corona virus develops, and whether we witness trends that the severe restrictions imposed by several countries have an effect on the rate of infection, hospitalization and the number of deaths.

 – Furthermore, the effects of all the restrictions on the general economy will be profound. Figures such as unemployment and industrial production will be important factors, Bringedal believes.

Severe economic consequences

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Dagfin Norum, head of fixed income and allocation.

Dagfin Norum, head of fixed income at Storebrand, explains that the fixed income and credit market is still characterized by the current turbulence, where the outbreak of the corona virus has lead to increasing shutdowns both in Norway and globally.

– This virus will obviously have major consequences on the real economy in the near future. However, the authorities both in Norway and abroad have stepped up with very comprehensive support packages to stimulate their economies and reduce the negative effects of the pandemic, says Norum.

 As Norum commented last week, the leading central banks globally and at home have also implemented rate cuts, increased quantitative easing and established liquidity facilities. The measures taken by the central banks have worked and have improved cash flow in the markets.

 – In Norway, the increased access to F-loans in both NOK and USD, together with increased Norwegian krone purchases from the Norwegian Central bank have helped alleviate a stressed market situation. This has resulted in the krone strengthening markedly against the US dollar and Euro throughout the week. In addition, credit spreads have come in somewhat and interest rates have risen slightly over the entire yield curve. In the money market, credit surcharges are still high by almost 0.8 per cent and still illustrate uncertainty and strained cash flow, says Norum.

Improvement the last week

During the week, and especially in the past three days, the cash flow situation has improved significantly in the credit markets – especially within the Investment Grade space, but also within the High Yield segment.

– This is a clear sign that the measures implemented are working, and not least has the reversal of the Krone depreciation helped to improve the market situation. This, in turn, has resulted in us seeing the first issues in credit again towards the end of this week, says Norum.

Keep calm and stick to the strategy

 
Norum points out that he and his team have chosen to keep calm during the past two weeks.

 – The market has moved very fast, with limited cash flow, and for a long–term investor, it will be natural to stick to his strategy even during such periods. We have thus continuously adjusted the cash flow and ensured that we have maintained the risk level in the portfolios throughout the period. We are now neutral weighted duration, with some overweight in credit exposure, Norum says.

Persistent uncertainty

  
There is still considerable uncertainty about the duration of the corona crisis and its financial consequences.

 – We therefore expect the market uncertainty to persist for a period, but believe that the worst turmoil has subsided. The credit spreads are still high by historic standards, and provide good ongoing returns, while recent credit spreads also contribute positively to the return. All in all, we thus expect a good return from the fixed income portfolios going forward, but are prepared for short term fluctuations, concludes Norum.

Historisk avkastning er ingen garanti for fremtidig avkastning. Fremtidig avkastning vil blant annet avhenge av markedsutviklingen, forvalters dyktighet, investeringsrisiko og kostnader ved forvaltning. Avkastningen kan bli negativ som følge av kursfall.