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Stick to the strategy

Over the past week, we have experienced some of the worst stock market swings in modern times. In addition, uncertainty about how the world's stock and credit markets will develop in the future is great. Storebrand's equity and fixed income management teams are monitoring the situation closely.

Published 19.03.2020 by Caroline Sesvold Tørring

DOWN:: Major falls on the Oslo Stock Exchange and other stock exchanges around the world in recent weeks. Photo: Kristian Skalland Moen.

The fluctuations in the markets are rampant and a large number of the world stock exchanges are now in bear territory. While investors tackle the corona outbreak and its effect on local economies an «oil war» has broken out between Saudi Arabia and Russia, which has given significantly lower oil prices and contributed to even further uncertainty.

Falling markets and pandemics – nothing new

The fall in the stock exchanges in recent days is not unique from a historical perspective. The stock market experiences these types of falls at irregular intervals. In fact, it is precisely these fluctuations that in the long run can give investors a higher expected return.

Pandemics are not new. Our experience with SARS, Ebola, the swine flu and other epidemics has shown that the negative impact on the economy is usually short-lived, despite great media focus and widespread fear.

While the spread is not under control, the uncertainty will be high and this will have negative effects on financial markets. Should earlier pandemics be a clue, it could take a while for things to normalize. A time that is not likely to have major financial consequences in the long run, and as a long-term investor, you should stay true to your investment strategy.
Storebrand's equity and credit portfolio managers are actively managing their portfolios while at the same time also trying not to make any hasty decisions. This is when experience counts.

Down 30 percent in one month

Bård Bringedal, head of equity management.

Bård Bringedal, head of equity management at Storebrand Asset Management, points out that the Oslo Stock Exchange has fallen more than 30 percent since the peak just one month ago, and several companies are priced at levels we last saw during the financial crisis.

– Authorities and central banks have implemented several measures to support the economy, but the uncertainty surrounding the short-term and long-term effects of the coronavirus is still too great for stock markets to stabilize.

Good cash flow

At Storebrand it is business as usual, when it comes to the investment management of our funds, despite very turbulent markets.

– Despite very volatile markets, we experience a good cash flow. When it comes to active mandates, we naturally follow the situation a bit more closely, and make continuous adjustments to our over- and underweights. We have now been through a sustained period of declining and turbulent markets, and it may continue for a while. But if history has taught us something it is that the market will eventually normalize and we will make sure that our portfolios are positioned to take part in the upswing, Bringedal points out.

We can learn from history

The market is characterized by great uncertainty, and if there is something that the market does not value, it is just that.

– We think that uncertainty could last for a while. At the same time, we know that several companies now are priced low in relation to their own history, and investments in the stock market at these pricing levels have historically produced good returns with a few years' horizon. When you see indications that the corona situation is globally under control, one should be overweight shares, says Bringedal

Strong turbulence in the fixed income and credit markets

Dagfin Norum, head of fixed income and allocation.

Dagfin Norum, head of fixed income and allocation at Storebrand Asset Management explains that the fixed income and credit markets are also severely affected by the uncertainty.

– The outbreak of the coronavirus is causing increasing restrictions both here in Norway and globally, thus dampening economic activity. However, we see that central banks and local authorities are trying to stimulate economic activity, supporting financial markets and limiting potential bankruptcies, says Norum.

Heavy interest rate declines since February

As leading central banks globally cut rates so did the central bank of Norway. Norway also saw increased quantitative easing through the establishment of cash flow facilities. There has been a sharp fall in interest rates since mid-February, both in the short and long end of the yield curve. In most countries, including both Norway and the United States, we have observed the lowest interest rates ever, even lower than what we saw in the wake of the financial crisis.

– At the same time, credit spreads are widening significantly, both because of the uncertainty now prevailing and how the loss of economic activity will affect the business sector, but also because of tighter cash flow in the financial markets. The change in credit spreads has been very swift, in close correlation to the falling stock markets. The levels we are now observing are close to those we saw during the financial crisis, Norum says.

Solid companies with good credit quality

Our bond funds, which have moderate interest rate and credit risk, have benefited from the fall in interest rates. But the widening in credit spreads has contributed negatively and has led to an overall negative return so far this year.

– We are also experiencing short term negative returns in our money market funds. Increased credit spreads have a negative effect in the short run, but our funds are invested in solid companies with good credit quality. In the longer term, the spread output gives us higher ongoing returns in the funds, says Norum.

Staying ahead

Norum says that despite the increased uncertainty and volatility in the market, his team has been sticking to its strategy and to use a Norwegian expression "sitting relatively quiet in the boat" . They have, consequently, kept the risk exposure unchanged.

– The market has moved very quickly and the credit spreads we are now observing are considered attractive in the longer term. We have been ahead of the market and made the necessary adjustments to meet the customers' need to reallocate to shares or meet other cash flow needs. We were overweight in February before interest rates began to fall but have taken this weight down to neutral after interest rates dropped to today's low level, says Norum.

Good opportunity to consider fixed income funds

The only thing that is certain is that most of this uncertainty will last for a while. However, there are signs that credit spreads are peaking after the recent market increase. In the longer term, we believe the increased risk premium will contribute to a higher return for our customers.

– Historically, credit spreads at the levels we now see have been a good opportunity for investors to increase their credit exposure, and thus achieve a higher expected return in the long run. We also see that both central banks and the authorities are implementing powerful measures that we expect will help stabilize interest rates and credit markets in the future, Norum points out.

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.