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End of QE fears trump Swedish political woes

While the surge in support for Swedish anti-immigration party Social Democrats is a concern, it is the scaling back of quantitative easing (QE) by the European Central Bank that has a Swedish fund selector most worried.

Consortum Capital Investments head of asset management, Mikael Westin, said his biggest concern was for the global macro outlook was the gradual tapering of QE announced by the ECB.

“The boost the ultra-loose central bank policy has given to the world economy is now in reverse,” the Stockholm-based selector told Expert Investor. “The opposite policy will lead to the opposite result,”

As previously reported, Swedish fund selectors in Q2 2018 had become considerably less optimistic with 41% being either negative or uncertain, much bleaker than the pan-European sentiment that had 49% positive, according to Last Word Research.

Westin said the European Central Bank had “no ammunition left” – and combined with the escalating trade war between China and the US and high initial debt levels in the west – there were “no buffers” to cushion the fallout from the next downturn.

He said he was most worried about corporate bonds as there were already liquidity limitations coupled with compressed margins.

“I think we will need to estrange ourselves from this asset class in a downturn if investors lose confidence in them because there are no buyers at that time,” he said.

As an alternative to bonds, Westin said he was overweight hedge funds and neutral towards equities.

“We see hedge funds as alternative base in a portfolio and our equity exposure is according to what our short term tactical view on equity markets,” he said.

“Currently we are neutral towards equities and overweight hedge funds and underweight bonds. We think we have one more uptick in the market before it gets worse since we think it’s quite late into the cycle.”

Westin noted that his next move would be to decrease his equity exposure but was not sure when, and would also “pocket in some credit worth bonds”.

Using a defensive play at the moment, Westin said the bonds would be low credit risk, short duration government bonds in a developed market – most likely Swedish or hedged in Swedish krona.

Frontier markets

According to the research, 53% of Swedish selectors were looking to decrease their European equity holdings over the 12 months to June 2019.

However, the Swedes were the most positive on frontier market equities out of the 13 countries surveyed with 41% looking to increase, 35% to hold, and 24% did not use the asset class.

Westin said he looked to hold the asset class but that his exposure had been very good.

“Frontier markets have been very weak but we have exposure with a fund and it has done very well by creating a lot of alpha and so that’s mainly why we’re keeping the exposure right now. But in a downturn I don’t think they will have the resilience that the emerging markets will have as a lot of the bad news has already been priced in,” Westin said.

Swedish election

Despite the rise in support for the nationalist Sweden Democrats in the country’s recent election – which could hand the group which has neo-Nazi roots influence in the next coalition government – Westin said the election result had not affected fund intentions as Swedish policy did not have much impact on equity markets.

“The Swedish krona has been affected as it weakened before the election and strengthened after. Over time we think it will continue to strengthen,” Westin said.

“It might be negative for exports, but overall will be positive for Swedish equities. Over the next year, we will look to bring back some foreign exposure to Swedish equities, but this is not directly related to the election.”

Favourite funds

Westin said his favourite long/short equity hedge fund was Gladiator and according to Morningstar, the fund has returned 13% over the three years to 31 August 2018.

He said he used Global Evolution Frontier Markets I bond fund as it has a portfolio yield-to-maturity of 13.4%. The fund has returned 5.1% over the three years.

OPM Listed Private Equity fund returned 10.4% over the same time period and Westin said it was an interesting segment with a strong underlying NAV growth.

For high alpha generation in an under-researched market with little foreign interest, Westin said he liked PineBridge Japan Small Cap Equity A12 and Tundra Sustainable Frontier Fund A. The Tundra fund has returned 5.8% over the three years to 31 August 2018 and the PineBridge fund has only been available since September 2017.

Jassmyn Goh

Jassmyn reported from Sydney to New York to Jakarta before joining Expert Investor. She was most recently Features Editor at Money Management and Super Review in Sydney.

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