Performance, March 2019

15.04.2019

News

Brexit chaos reached new highs in March

  • The level of chaos surrounding Britain’s withdrawal from the EU reached new highs in the course of March. This resulted, among other things, in the rejection of eight different proposals on one day by the British parliament – and in Prime Minister Theresa May’s agreement with the EU once again being rejected. The EU’s response is that if Britain does not reach a conclusion before 12 April, the result is a hard Brexit – whereas approval of an agreement means that Brexit can be delayed until 22 May. A longer delay requires that Britain enters into an agreement before 10 April. At the present point in time, the parliament has taken over the process, and Theresa May’s response has been that she offers to resign if the  parliament adopts the existing Brexit deal with the EU.

Negotiations between the US and China in the light of weak economic indicators

  • The trade negotiations between the US and China are taking place in the light of weak economic indicators and the already implemented sanctions. This left its mark on the negotiations in March when China for instance granted new admissions in the form of higher possibilities of foreign ownership interests and added new economic stimuli within for instance infrastructure. Both Chinese and US economic indicators seem to be affected by the trade war. This was also the case in Europe where for instance the German industrial tendency survey reached its lowest level for seven years.

Sluggish economic momentum did not escape Federal Reserve

  • The Federal Reserve (Fed) is aware of the state of the economy, not only in the US but also globally. Consequently, we saw new and mild winds from Fed governor, Jerome Powell, in the course of March. There are now only prospects of one additional interest-rate hike from the Fed in 2019 and only one in the course of 2020. The dire straits from the Fed governor were visible in for instance US interest rates where 10-year government bonds declined to a level in line with two-year papers.

Market return

Despite challenges optimism was reasonably upheld in March

  • Following a fantastic start to the year, the trend in March was more mixed. All in all, optimism in the equity markets in both the US, Europe and the Far East was upheld. This was the case despite Brexit chaos and weak economic indicators. Among the sources why investors held on was the mild winds from the Fed and the resultant lower US government bonds. This supported the interest-rate sensitive equities within properties and utility, among others. In addition, the least cyclical equities within for instance consumer staples were also in demand. A good source behind Danish investors’ positive returns was, however, an increase in the dollar of approx. 1.5%.

Weak indicators triggered a positive trend in the bond markets

  • The yield level was on the decline in March due to general concern about economic growth. The yield on 10-year Danish government bonds was zero at the end of the month – corresponding to a fall of 0.25 percentage point in March. At its recent meeting, the ECB postponed the time of the first interest-rate hike from autumn to the beginning of 2020 and also announced new LTRO allotments. At the mortgage market, the declining interest-rate level meant that 30-year mortgage bonds with coupons of 1.5% were trading above 100 and hence closed for issues. At the end of the month, a 30-year bond with a 1 per cent coupon was opened. One of the reasons behind the positive trend of mortgage bonds was the restructuring of the financing of subsidised social housing. Mortgage credit institutions have therefore initiated a buy-up of 1.5% bonds expiring in 2047 in order to redeem the underlying loans. Investors in these bonds have therefore demanded other long-term mortgage bonds.
  • The continuously falling US interest rates supported emerging-market bonds in March. We still see a positive net demand but not of quite the same sizes as at the beginning of 2019. New issues were applauded with considerable appetite. Emerging-market bonds (external debt) yielded a return above 1% whereas emerging-market bonds in local currency yielded a lower, yet positive return. Yet, not everything is a bed of roses, and Argentine assets were very much under pressure due to opinion polls and high inflation figures whereas the local elections and an alternative monetary policy yet again put pressure on Turkish assets.  
  • The buzzword of the month in the corporate bond market was japanification of the European economy, but once again the negative trend in the economy resulted in positive returns in the credit markets since greater importance was attached to the milder winds from the ECB and the Fed than to the current economic indicators. The financial statements came out as expected for most companies. The continued spread narrowing resulted in good positive returns in March. Both within investment grade and bonds with lower credit ratings.