2020 was an eventful year. The pandemic hit brutally, both equity and fixed income markets, before a record quick recovery during the latter part of the year. The world's governments and central banks have acted forcefully to support the economy and the expectations for 2021 are in many places high - so high that at the start of the year, the equity market has started in a bullish fashion
On the equity side, valuations have in many cases started to drift away and many of Swedish large caps today have P/E ratios above 30. On the First North-market there are 120-130 companies that have returns in excess of 10 percent so far this year, during one month. The top 10 performers have returns over 100% percent.
"The risk appetite is high", concludes equity portfolio manager Martin Nilsson of Catella Fonder ("Catella"), and the interest from private individuals is record high. In addition there is also a multiple expansion correlated to the falling interest rate, which has mainly rewarded growth companies.
"My base case scenario is an economic recovery during the year and interest rates that will rise at slow pace. This should lead to a slowing of the multiple expansion, all else equal, and that maybe favours more cyclical companies", says Martin Nilsson who expects companies' slimmed cost base to deliver leverage and a good year in equity markets.
During the end of last year, there was a rotation towards cyclical and industrial sectors, and somewhat to the bank/finance sector at the end of the year. Martin Nilsson mentions that the month of November was one of the best months ever for equity markets.
"Catalysts from positive vaccine news, where investors were willing to see around the corner, and Biden's victory over Trump. Looking at November, interest rates rose, from low levels, which initiated the rotation which perhaps has continued into the new year. It depends a lot upon interest rate levels", says Martin Nilsson.
In Sweden, companies have started announcing fourth quarter results. The Swedish krona has been strong for a while, and an interesting question is if it impacts the reports. Martin Nilsson so far does not see a large impact from that.
"There is no large impact from the reports released early. Among small caps on the other hand this will be noticed. Many also have hedges in place, which means the effect will be seen first in second and third quarters", he says.
Commodities overall have had a strong development for some time, where copper has traded at high levels while the oil price has recovered. Much of the development in metals is driven by electrification, according to Martin Nilsson. He remarks that the covid-crisis is different in its impact on commodities than a "normal" crisis. Normally oil demand declines only marginally, but in this case a lot of the demand disappeared.
"Planes were grounded, people didn't go to work and so forth, so it's a different crisis for the oil sector. Also, there is a shift to greener alternatives. Metals on the other hand tend to fall heavily, in correlation with industrial production. Now metals have been strong, primarily during late autumn. It is driven by many factors: a weaker dollar which benefits metal prices generally, and an incredibly strong demand from China which consumes 50-60 percent of the world's metals", says Martin Nilsson.
As examples of companies which develop well in the sector, Martin Nilsson mentions Sandvik and Epiroc. In relation to metals which keeps on increasing in demand in general, and many of the mining companies have not invested in new mines, which creates a tight situation as demand comes back.
Another theme from last year which is highly topical are the dividends from companies. Last year the companies' possibilities to get support and pay dividends to shareholders were restricted. This year it will probably be different.
"During 2020 there has been less mergers & acquisitions ("M&A") activity than we had anticipated. It has been difficult to perform due diligence. As things improve, we will see a lot of M&A, because that is where the companies will spend their money. If they can't do M&A they will distribute to shareholders", says Martin Nilsson.
He emphasises that Swedish companies in general have strong balance sheets. Many large Swedish listed companies also trade at relatively high valuations, which can impact willingness to do deals.
"If you have a high valuation you can use the own share as currency to do deals. But probably it will be a combination in many of the cases", says Martin Nilsson.
Do you look for takeover candidates?
"You always look for those cases. You don't want to sell cheap, but it is always exciting when there is a bid for companies you own. But it is not the basic thesis in our analysis that the company will be acquired, but is more an option that it can happen".
Martin Nilsson's impression of the reports so far is that they are strong and solid. He mentions Autoliv in particular, but also the SEB report gets praise as well as the report from Essity, that for some time has been lagging.
The auto industry has for a while been below trend according to Martin Nilsson, but he mentions that the sector is under change driven by large technological innovation and many new companies have emerged. A laggard sector is banking, which amongst other things has been kept back by threats of money laundering fines. This year may be brighter for the banking sector, the Catella portfolio manager thinks.
"It could be year of the banks. The banks have big challenges on the tech side, but if you compare a banks valuation the overall stock market it is low. If they only deliver good reports it will probably go the right way", says Martin Nilsson.
A mega trend in the world's equity markets is ESG, shares with a sustainability link. This trend has pushed many share prices during last years and during 2021 EU's directive will start to be implemented to try to steer capital to more sustainable solutions. This will probably have impacts, according to Martin Nilsson.
"Some sectors will benefit, such as renovation, isolation and energy efficiency. This will benefit many Nordic companies in ventilation, windows, and doors. We have Inwido on windows, Systemair on ventilation, Lindab with others", he says.
When Catella Fonder started investing in Inwido the company had P/E-ratio of 10, now it is trading at 16. Still cheap compared to many other ESG-cases, but a multiple expansion nonetheless. Part from these companies there is still strong interest for more traditional sustainability companies, where there is a strong multiple expansion, like Vestas and Tomra.
On the fixed income side there are still no signs of inflation, which makes it possible to keep on stimulating in many ways. According to some, the result has been high inflation in assets, and the expectation that this will translate into inflation on ordinary goods and services.
"Those expectations have increased somewhat, from very low levels. This has led to US rates starting to move, they have doubled since August. You can interpret that the Fed wants to move away from the monetary stimulus", says Catella Fonder's fixed income portfolio manager Stefan Wigstrand.
Stefan Wigstrand describes a situation where central banks account for half of sovereign debt in the world, while we have enormous budget deficits as a consequence of corona stimulus packages. In that environment it would be strange if interest rates can remain at these low levels, he deems.
A portfolio which contains low risk with mainly investment grade-paper, what could you expect in terms of returns this year?
"In that category there is competition, with the Swedish Riksbank buying, and we are back at levels before the pandemic, if not even lower. That sets the framework of what could be expected. Avkastningsfonden, which has the lowest risk, has an average yield of around one percent gross returns. Here you need activity to reach the goal, which is one percent net per annum", says Stefan Wigstrand.
In Credit Opportunity, where you could have the whole portfolio in high yield-paper and can combine that with cash like instruments and derivatives. Where are your expectations?
"That is a totally different market with majority high risk paper. We have seen an appreciation from the losses that occurred this spring, but the new deals that are being done are at good levels, and in total we have a good yield in the Catella Credit Opportunity fund. For Catella Credit Opportunity we expect net returns of 4-6 percent.
Stefan Wigstrand adds that the scenario that many expected at the start of the pandemic, with high default rates has not yet materialised. After having expected default levels at around 10-15 percent, there have only been few defaults. The danger is not over yet, and the year can be particularly difficult for the companies that don't have access to capital markets, but all in all the situation in the fixed income market is completely different from around a year ago.