It was worth listening to Catella’s podcasts in 2017. Not least when analyst Arvid Lindquist warned of excessive housing construction in the cities and that commercial premises in less attractive locations would have a tough time – and that’s how it turned out
Participants: Mikael Wickbom, Catella’s fund managers Martin Jonsson (Catella Hedgefond), Martin Nilsson (Catella Hedgefond, Catella Nordic Long/Short Equity, and Catella Småbolagsfond) and Tomas Elofsson, who is responsible for the entire management team and also deals with fixed income management.
The market outlook and expected stock market trend for 2017 were also fairly close to Catella’s forecasts. The initial positive stock market impact from Trump taking office was somewhat unexpected, and oil prices have been slightly stronger than predicted.
Mikael Wickbom: If we look forward for 2018, are there any major clouds on the horizon?
TE: As far as China is concerned, it’s really hard to know what data points are coming out and which can be trusted. In the past, they have stimulated the economy a lot and they may withdraw some of this stimulus. If the rest of the world continues to grow, not as much growth will be needed. If China and the US remain at current levels and we see growth in other markets, China will manage well despite reduced stimulus. Perhaps the world’s reliance on China will not remain as great. Then you have to wonder whether there will be even more pressure, which could force the central banks back onto the tracks.
But Martin, aren’t you expecting more synchronised growth activity globally.
MJ: That’s what we’re seeing right now, the level of activity is high and capacity utilisation is increasing, maybe it’s about to peak. Hard data may come in slightly less well, and at the same time we may get a little slower growth and slightly higher inflation, which would not be so great. The United States is approaching full employment. This indicates that we are approaching the peak in the US, that we will get some inflation and that the economy will calm down.
TE: It’s probably good for the market if it calms down a bit, as it’s time for a bit of inflation and somewhat weaker figures to cool it down a bit instead of central banks having to act.
Looking at capacity utilisation, it is high today. Will the economy be more driven by investments from industry in the future? And do many analysts see this as negative?
MJ: Many analysts may see this as negative when looking at the investment numbers, but they do note that the first phase was mostly driven by low interest rates and multiple expansion, and now we are starting to see a synchronised better economy.
Commodity prices have risen more than expected. What is the view here, will they fall back? We have not seen the same pressure on agricultural products as on metals.
MN: Oil inventories have begun to fall, and this provides a higher oil price incentive for the US shale oil industry. In order for oil prices to rise more, a geopolitical event would be needed, so it is more likely that oil prices will fall. Demand for oil is currently very strong, which might be hard for many to believe, which is balancing the price at the moment.
For metals, it is a much more difficult situation. They are benefitting from the weaker dollar and high demand. They are being driven by a strong economy, by electric cars and so on, so they may well continue to rise. I think things will continue to look tight. Take copper, for example, we consume more than we produce.
Commodities companies have now been driven up some way, Boliden which has copper and zinc for example. Is most of this factored into today’s share prices or will it continue? This varies from company to company, Boliden is more sensitive to exchange rates than to metal prices. It could even continue to rise. It’s the opposite for SSAB: The steel price for its heavy plate in the US averaged 660 dollars per ton in the fourth quarter. Last week it was to be 860 dollars per ton in Q1, but yesterday they raised the prices by another 50 dollars. So now the price at the end of the quarter will be 910 dollars per ton.
You have previously said that investors who believe equities are overpriced should not invest in traditional long-term debt securities, but rather should look to corporate bonds. Do you think that’s okay this year as well?
TE: Yes, the same probably applies this year. I think that spreads will probably widen a little, but at the same time you get a high current return. We have long been sceptical about having a long duration on the fixed income side, it’s something that we have thought a lot about.
Sometime this year QE purchases will surely have to end. Whether that happens now or if it is done when the situation is weaker it may not be ideal. The US has started to reduce its balance sheet.
Interest rates could rise a lot and fairly quickly – which would increase the chance of an economic downturn. It can be tough when rates rise a lot and quickly.
What could be a problem for corporate bonds, and actually for the stock market as well, is if there is an economic downturn – and the risk of that has to be low, this year as well.
What are you doing with the portfolios?
MN: In the hedge fund we have placed great emphasis on what to do to be less correlated with the rest of the markets and have succeeded with that. Last year the return was 4.7 percent in the fund at low risk and almost entirely without any correlation with the market. If we look at the performance in summer 2017, for example, the fund had a small positive return while the stock market fell by 6-7 percent over the summer months.
Was there anything specific that did well for you in the hedge fund?
TE: There was favourable performance on the fixed income side, in terms of both the running yield and narrowing spreads. And the equities side did at least as well.
Strong contributions on the equities side. Did that include Storebrand and DNA on the long side?
MN: If we try to group by sector, we made quite a lot on energy and commodities, but also more defensive sectors like telecoms for example. And Storebrand and the insurance side, which played a little into the interest rates/commodities theme.
MJ: Then it was positive that all four long/short mandates in the fund generated a positive return. But those returns did not all come at the same time, and in some cases one performed better and the other worse.
The outlook for the year has been heavily influenced by housing. We closed a large number of positions in the late autumn, with good profits. Right now it’s wait and see, we are probably balanced. Seeing a sharp fall in prices in a strong global economic climate, interest rates remain low and people are in work, we don’t believe that.
Some of the housing developers have taken a huge beating. I read in Affärsvärlden that Oscar Properties, for example, could be a buy because it has dropped so much.
MN: New construction is slowing down, and that's logical. We have had excess construction that is now disappearing. A main scenario is slowly rising interest rates. I think interest rates could rise quite a lot more before it damages the economy. We remain cautious towards housing developers.
Then there are construction companies like NCC and Ahlsell that are perhaps not as exposed as a JM.
So, what is the outlook for other sectors this year?
MJ: After Lehman the view was that you should buy shares in northern Europe. Now it’s a bit reversed, now you should leave the north and enter the south, where things look a little better.
The Swedish banks did well for a long time, while the European banks had problems. When the Financial Times writes about the problems in the Swedish housing market, people listen.
Otherwise, overall it looks good, but some sectors will have a tougher time passing on inflation. We look for quality companies that will manage to pass on any inflation with increased prices to their customers. ABB is our largest position in engineering and is an example of the late cyclical theme. What we are seeing now with ABB is accelerating organic growth, we believe, and this is something we expect for the sector.
The expectation now is that the Riksbank will raise interest rates this year. Most commentators believe the krona is very cheap, but I'm not sure. If the dollar drops a lot, like in summer 2017 – it’s very much about how the dollar grows against other regions.
We do not have any particularly strong sector viewpoint, and we orient towards a value perspective rather than a growth perspective. Then it might be tough in the US, where the FANG stocks (Facebook, Amazon, Netflix and Alphabet) have been very strong. We have a fairly defensive value-oriented portfolio. We are still defensive towards banking but we are confident about, for example, Securitas.
We are upbeat about Storebrand. It will benefit from rising interest rates and is traded at p/b 1 and was at p/b 0.4 when we started.
What are you looking at in terms of shorts?
MN: What Martin is interested in, where there could be multiple contraction. For example Coloplast in Denmark, which has a relatively high multiple.
How about stock market performance for 2018, the start has been strong?
TE: Well, I could say zero, which gives a bit of movement.
MN: I would say plus 3, which means I win if it goes above 3.
No big minus numbers then. And we can take the opportunity to remember that a number of Catella’s funds are able to make money even when markets are falling.