Dear customer
Another week has passed and it seems like we're in the middle of the storm right now. We're still operating from home and it looks like that situation will continue for a while longer. While this presents some challenges, it's important to take the necessary measures to get the virus under control.
Although market conditions are demanding, there are several opportunities for Kraft Høyrente. The portfolio has no problem children. These are solid companies that will strengthen in the time to come. The effective interest rate is approximately 13.5 per cent. The average price of the loans in the portfolio is around 80 per cent. In addition, we have a short portfolio, which means we will get our money back quickly, even if the market does not improve. Most likely, unitholders will be left with a capital gain of 5-7 per cent, plus the effective interest rate. We also have a solid cash balance that gives us room to manoeuvre in these challenging times.
Sit through
My clear advice is to still sit through this period. There are two reasons why I recommend exactly that:
1) The upturn will come. Gigantic stimulus packages are now being pumped into the system. This will help create good growth and investment opportunities in the years to come.
2) As I mentioned last time, it's important to ignore the daily fluctuations. These fluctuations are driven by irrational forces. Remember that our portfolio consists of loans. These loans are bound by legal agreements and the loans must be repaid with interest. What's important is that your money is safe in the portfolio and you will probably get it back with principal, interest and capital gains.
This week has been nothing short of brutal. Fluctuations are breaking all previous records. The price swings have been more brutal than during the 1987 crash, and all markets have been affected. Stock markets in the US have had their worst week since the financial crisis. The Norwegian krone has been record weak against the USD, EUR and GBP. One dollar cost almost NOK 12 (!) earlier in the week. At the same time, 80 per cent of businesses are considering layoffs and unemployment has doubled in less than a week. As recently as Friday, Norges Bank lowered its interest rate further from 0.75 per cent to 0.25 per cent. As with the financial crisis, there is a great deal of fear in the capital markets, but that is where the similarities end.
There are major differences between what we are experiencing now and the situation during the financial crisis. The financial crisis posed a gigantic threat to the global financial system. The coronavirus is a transient virus. We have no financial, state or banking crisis. What we have is a system in crisis, ruled by fear, which has brought the global economy to a standstill. When the world switches the machines back on, we will probably head towards where we were before the coronavirus. At the same time, interest rates will still be at zero, and the big stimulus packages will provide stimuli for a long time to come. This will of course present gigantic opportunities.
Huge stimulus packages
Since I wrote my last letter to you, the virus has become even more established and we have registered an even greater lockdown in Europe. In addition, the US has begun to take the coronavirus seriously. As expected, we have therefore seen governments and central banks come up with stimulus packages that just keep getting bigger and bigger. On Sunday, Norway decided to re-establish the Government Bond Fund. The fund will be operational very soon and will be an important stabilising factor. Erna Solberg has been clear that she will do whatever it takes to help companies, and the bond market, through this turbulent period.
In Sweden, the Riksbank has committed almost SEK 1 trillion, of which SEK 500 billion will go to companies and SEK 300 billion to the bond market. Finally, the European Central Bank (ECB) and the US also came on board with stimulus packages totalling USD 2.5 trillion. In addition, the US will send USD 1,000 to every adult and USD 500 to every child. In total, all of these packages, directly or indirectly, amount to USD 6-7 trillion globally.
The past week has also been characterised by a lot of price declines for Kraft Høyrente, apart from Friday when sentiment has been better. Much of the decline this week is partly due to the panic that arose early in the week, which resulted in a lot of sales from Sweden. Now the worst of the selling pressure from Sweden has subsided and the market seems to be establishing a bottom. Both the European Central Bank and the Swedish Riksbank have been active on Friday. Most risk parameters were also green on Friday.
Different content and different properties
Kraft Høyrente is in risk group 2. This basically means a low-risk fund, but the state of emergency in the world has ensured that we have also had to take a sharp fall. However, the fund's investments are solid and reflect the risk category we are in. However, this risk classification does not measure market risk when the world is in a state of emergency, which we rarely experience, but which is the case right now.
The funds that are in risk class 2 all have different content and different characteristics. They are affected differently by the various market conditions. The funds in risk class 2 that have performed best during this period are those that have had a large proportion of fixed-rate loans. When interest rates fall, these loans will go up in price, but this does not mean that these funds will behave well in other crises. During the EU crisis in 2011, these funds struggled when the yield curve began to steepen. Some funds have a large proportion of government debt, which was not good in 2011 either, but the following year these funds received a huge boost when the European Central Bank started trading down all interest rates.
It is quite possible that we will see the steepest recession in history. The global economy is worth 80 trillion US dollars and during the downturn, 10-13 trillion dollars in value creation could quickly disappear. Once the world is back to work, the global economy will return to USD 80 trillion, and it is likely that all the stimulus packages will add a further USD 6-7 trillion. The reason for this is that the stimulus will remain in the market long after the virus is gone. It also means that the correction back is likely to be as steep upwards as the downturn was downwards.
As usual, I will get back to you if there are any further developments in the portfolio or the market.
Thank you for this time,
Regards
Øivind Thorstensen, Portfolio Manager at Kraft Høyrente
