General Market Review
In March global stock markets posted a broad decline. Particularly, technology stocks sold off strongly with the Nasdaq Composite Index tumbling -8.1% amid rising economic concerns and escalating geopolitical tensions. Geopolitically the focus was still on tariffs, as the president of the USA imposed a 25% tariff on imports of automobiles and certain automobile parts that would come into effect on April 2. He also hinted at a massive imposition of aggressive trade tariffs to be unveiled as part of the “Liberation Day” policy. The ongoing conflict between Russia and Ukraine intensified with unprecedented drone attacks on Moscow, marking the most significant assault on Russian territory since the conflict began in February 2022. During its meeting on March 5-6, the ECB expressed significant concerns about the potential economic impact of US-American tariffs. Policymakers warned that such tariffs, along with possible retaliatory measures, could hamper economic growth and lead to inflationary uncertainties. In response, the ECB decided to cut its key interest rate further by 25 Bp from 2.75% to 2.5%. In the US, the labour market was mixed as non-farm payrolls increased by +151k in February from +143k in January but the unemployment rate was slightly higher at 4.1% in February. In the Eurozone, the unemployment rate decreased by 10 Bp to 6.2%. In the US, consumer price inflation for the month of February was below consensus and slightly lower than in the prior month. Headline inflation has increased by +2.8% (y-o-y) whereas core inflation (excluding energy and food) came in at +3.1% (y-o-y).
In the Eurozone, consumer price inflation figures for the month of February came in lower versus the prior month. Headline inflation has increased by +2.3% whereas core-inflation by +2.6% respectively. US 10-year treasury yields were unchanged at 4.21%. On the other hand, German 10-year bund yields have increased by +33 bp from 2.41% to 2.74%. The MSCI World Index decreased by -4.5% (USD den.) and the MSCI Europe Index by -4.0% (EUR den.).
Portfolio Management Report
Following a deterioration in sentiment in February, this should continue in March due to increased uncertainty over tariffs. Recent weeks have brought growing concerns about the global economic growth. These worries have been amplified by the US-administration. In this difficult environment, High Yield has held up relatively well. Anyhow spreads have widened by 67 Bp in the US and by +55 Bp in Global High Yield. This could not be offset by 5-year US Treasury yields which tightened around 7 Bp. Generally, long term interest rates in the US have been on a modest downward trend. The yields on the US High Yield market rose to 7.7% last seen in August 2024. Both yields and spreads jumped the most since September 2022 driving a loss of a little more than 1% (Global High Yield: -0.9%). This was the biggest monthly loss in 17 months. The most resilient segment within the broad High Yield universe once again was the Nordic High Yield market with a spread widening of roughly 9 Bp. At the end of the month, the Nordic High Yield segment could generate +0.7% which is partly due to the high carry. The modest negative price changes could be explained by a several factors: First, investors have become selectively more cautious on certain names amid the uncertainty regarding tariffs. Second, a high degree of primary activity and tight pricing carrying only marginal new issue premia could have led to some underperformance in the secondary market. Having said this, the Nordic High Yield market typically reacts with some time lag. If global High Yield spreads continue to rise, Nordic spread could do so either. Nordic High Yield primary market was strong again in March. Deal numbers currently are at record highs and pipelines appear solid. However, continued macroeconomic uncertainty ahead may induce some issuers to come to the market earlier rather than later, wanting to close financing before Easter break. As primary activity was high, secondary market trading was rather low in March. Supply came in around NOK46bn (USD4.3bn equivalent). A volume of around USD3bn equivalent was solely related to issues from US-Dollar- or Euro. Out of that, 40% of the bonds were issued from transportation (c.4%) and energy (c.36%) companies. In the energy sector, one relevant company entered the market: Diversified Energy Company – an US-based exploration and production company – issued USD300mn in a senior secured bond transaction maturing in 2029. The deal was priced with a discount at 98% with an attractive yield of 10.375%. After thorough analysis we decided to skip the deal as the company has got a high leverage (gross leverage >11x) with lots of debt packed into ABS-notes culminating in a complex debt structure. Parts of that high leverage is due to its business strategy to grow through acquisitions. The latest one was Maverick Natural Resources, that was consummated just recently. This acquisition marks a turning point in the history of Diversified Energy by entering the Permian Basin. We argue that the company is late in the cycle and that deleveraging might not be quick enough to cope with the risks associated with the acquisition and the huge debt load. The US primary market saw a lot of supply in March. Borrowers rushed to market placing around 80% of the total volume until March 26. Since then, volatility picked up again following the news of the introduction of 25% tariffs on car imports. In total USD26.6bn was priced on the US primary market, which was in-line with volume one year ago in March 2024. Only around 25% of total volume was issued from transport, energy and utility companies. Within our focus, there were a few companies entering the market. A great example for the risk-off mood end of March was the deal of Forvia SE, a French auto supplier, that debuted on the US primary market. The company was forced to sweeten terms to sell its bonds only few hours before pricing by increasing the yield to 8% from IPT at 7.75% following the auto tariffs decision that was released at the same time. One of the most prominent deals was Viridien (formerly known as CGG), a company operating in the seismic segment. Viridien was successfully restructured in 2018 and has transitioned to an asset-light model since by entirely selling its high-end vessels by the end of 2019 to Shearwater GeoServices AS. Meanwhile, Viridien has a flexible business model. The company was able to reduce its debt and streamline its balance sheet through the new debt collected on the market. It issued 5-year senior secured notes in two tranches: 5NC2 USD450mn and 5NC2 EUR475mn priced at a yield of 10% respectively 8.5%. We saw fair value around 9.5% respectively 8%, therefore we participated in the deal.
In March, we invested in bonds from oil producing and oil service companies. The effective duration of the fund was held stable at around 2.1%. Additionally, we used inflows to increase the cash position to 10% due to the uncertainty of potential tariffs. Nonetheless, we are still seeing some good opportunities to deploy cash but are getting more cautious and selective on deals to come on the primary as well as on the secondary market. During the month we increased our exposure in a company operating in the OSV-segment specializing in Floating Production Storage and Offloading (FPSO) vessels after the release of sound annual financial results. We participated in the Viridien deal and bought the USD issue. We did not participate in any other new issues that came to the primary market.
For more information, you can find our latest Factsheet – March 2025.
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