Fighting inflation or the Federal Reserve is probably a challenge for the market. We continue to see that inflation is more clearly anchored and in the most recent Federal Open Market Committee meeting, chair Jerome Powell at the US Federal Reserve stated that they will start raising interest rates soon. This near future is probably in March, according to the market pricing and most strategists. The pandemic continues to have an impact, but the economic recovery we have seen has been impressive. Company reports for the fourth quarter generally show strength, despite increased costs.
The year 2021 ended very strongly in the credit market and for equities. Therefore, a possible retreat in January was not entirely unexpected. Credit spreads widened and in the equity world especially tech stocks traded down. The index for global investment grade and global high yield fell by about 2.5 per cent, while the fund's share class in the same currency fell by about 1.5 per cent. We had a cautious exposure when we started in 2022, with a shorter credit duration and a slightly higher cash share in the fund.
We believe that when US interest rate hikes come into place and it becomes more concrete, the market will adjust to a higher base for at least US interest rates. We believe the UK will probably also raise their interest rates. In our view, it is positive that policy rates begin their journey towards normalisation. This increases the opportunities for higher yields and higher coupons going forward. It is also a natural step for central banks to end their quantitative easing of various kinds and let the market control supply and demand.
The new issue market has been very active in investment grade but restrained in global high yield. Most issuers want to wait and see where the spread levels begin to stabilise. The fund was also hesitant with new issues throughout the month and did not participate in any deals. The fund was only active in the secondary market, where we adjusted several positions and sold Wesco and Munich Re. It also became clear that Kraton Polymers will be sold to DL Chemical and the bonds were repurchased by the company.
A forecast for the rest of 2022, we believe, means slightly lower deal activity, with companies focusing on balance sheets and less on leveraged dividends and aggressive M&A deals. If that happens, it might be healthy after an incredibly active year in terms of corporate deals.
The fund is classified as an Article 9 fund according to the SFDR regulation.
The synthetic CDS credit index widened during January. The iTraxx Crossover index went from +243bp at the end of December to +287bp at the end of January.
Portfolio management team:
Philip Lindgren
Portfolio manager
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