The after party for the bull market

Ferdmagasinet 01-2015 Nachspiel i oksenes marked

We are now in the seventh year of rising share prices. But we have reached the stage in the cycle where a correction needs to be prepared for, according to Ferd Invest’s Lars Christian Tvedt, who can look back on 2014 as a year in which Ferd Invest achieved a positive return, even if not quite at the level targeted by this business area.

A host of international problems, a turbulent oil price, swings in the currency markets: 2014 certainly did not lack drama. However, all the Nordic stock markets continued their climb, with Copenhagen advancing the most with a 21% increase over the year, and Oslo advancing the least with an increase of just 5%.

“The Ferd Invest portfolio was up by 13.9% in 2014. In itself, this is not a bad result, and it is about the same as the benchmark index of Nordic shares that it is our target to beat. But we did not quite manage to beat the target, which means that we cannot be completely satisfied with 2014”, comments Lars Christian Tvedt, acting Head of Ferd Invest. He adds that the fall in the value of the Norwegian krone against the Euro and the Swedish and Danish currencies also contributed to the generally good performance of the portfolio when the return is translated into Norwegian kroner. “And we certainly can’t take the credit for that”, he adds.

Long-term returns
The statistics for the long-term performance of Ferd Invest’s Nordic share portfolio continue to be very good. Over the last five years the portfolio has delivered a total return of 96%, while during this period the benchmark index against which it is compared has increased by 91%.

“And if you look at performance over an even longer period, the numbers are even better. Since 2006, the portfolio has delivered a return of 114% as compared to 56% for the benchmark index”, comments Lars Christian Tvedt, who adds that there is always the possibility of unforeseen events having a significant impact, positive or negative, on the portfolio’s performance in any single year.

“Long-term performance is what matters the most. And ours is not so bad”, he adds.

Risk of bubbles
Lars Christian Tvedt thinks the general increase in share prices in 2014 was principally driven by falling commodity prices and the extremely low interest rate environment in which rates were zero in many countries and were even negative in some.

“In addition, a number of central banks have flooded the markets with liquidity in order to get their economies moving. Such conditions naturally make borrowing tempting, and it costs very little to borrow and invest. The flipside of this, however, is that it is easy to make ‘stupid’, ill-thought-out investments”, he comments.

The after party
Lars Christian Tvedt thinks the current way in which markets are continuing to rise is something of an after party for the bull market that began around 2009, representing a market characterised by optimism and expectations of further rises.

“Bull markets as they are called rarely die of old age; they rather die due to weaker earnings and excessive optimism. We are approaching a point where there is a risk that both of these will have an impact”, he comments.

A year ago, Ferd Invest did not expect markets to grow as strongly as they did in 2014. The market no longer had many worries, and as the old American investors’ saying goes, 'bull markets climb a wall of worry'. This is connected with the fact that stock markets usually anticipate movements in the real economy. The belief that the conditions that investors worry about eventually will be solved often leads to share prices rising a long time before the solutions are actually in place. But when there is less worry, the basis for further growth is weaker.

“The extensive artificial stimulus provided by expansive monetary policy and fiscal policy measures has, however, led to significant rises, without these necessarily reflecting any real underlying improvement. Abundant liquidity, the queue of investors in search of potentially good investments despite the correspondingly high levels of risk, and the shortage of good investment options constitute a dangerous mix”, he comments, and adds that the stock market is always a candidate for entering a bubble, and that we have now finally reached the stage in the cycle where a correction needs to be prepared for.

Prepared for quick disposals
Even if we are prepared for bubbles to form, it is difficult to predict when they will form and when they will burst. Maybe it will be in a few months, or maybe in a few years.

“Low interest rates, falling commodity prices and central banks pumping liquidity into the financial system are probably good enough medicine to ensure that markets will continue to rise in 2015 as well. It might be tempting to try to create a ‘safe’ portfolio, but doing so means risking missing out on the share price rises that we are expecting, but which are of course not guaranteed”, comments Lars Christian Tvedt, who underlines that it is easier to time the bottom of the market than the top.

“Our current strategy is to remain in the market for as long as prices continue to rise, whilst ensuring that we are vigilant and prepared to make quick, tactical disposals once we begin to see signs of difficulty”, he says.

Promising individual shares
However, the performance of the general market is not a key element of Ferd Invest’s strategy, even if it is not something that can be ignored.

“Just as in previous years, we are spending most of our energy on finding individual shares that have promise. In our view, the companies that have the greatest potential are those that have good products that are aimed at markets that offer significant growth opportunities, that are innovative companies run by skilled managers, and that have not yet been rewarded for this by equity markets”, comments Lars Christian Tvedt.

The company that made the biggest single contribution to the portfolio’s return in 2014 was Outokumpu, a Finish group that produces stainless steel and special alloys whose share price rose strongly after carrying out a financial turn-around.

“We saw that Outokumpu had potential in 2013, and we were able to make a very handsome profit in early 2014 by selling our holding in the company”, explains Lars Christian Tvedt. Autoliv, an international company based in Sweden that specialises in safety equipment for cars, also delivered a very strong return in 2014. The same also applies to the Finish company Kone, which is known for its elevators and escalators, and the Danish pharmaceutical company Novo Nordisk.

“Opera Software also made a good contribution to the portfolio’s return, even if not to the same extent as in 2013. The company was also the only large Norwegian holding left in the portfolio as we entered 2015”, he comments.

Energy and Russia a drag on the portfolio
Lars Christian Tvedt points out that Ferd Invest has been hesitant about investing on the Oslo stock exchange over the last few years. Among the small number of large companies listed on Oslo Børs, most were hit hard by the fluctuations in the oil price and the gas price in 2014, while the shares of the more numerous smaller companies have low liquidity, which means that it can be difficult to exit a position if a company's performance deteriorates.

“Our weakest investments in 2014 were primarily to be found in the energy sector, with PGS and Subsea 7 both a significant drag on the portfolio, and also among companies heavily exposed to the Russian economy. Not insignificant in this regard was Nokian Tyres, which was until not long ago a star performer in the portfolio, but which contributed to our failure to beat the market”, comments Lars Christian Tvedt.

NOK 5.2 billion
The market value of the Ferd Invest portfolio at the close of 2014 was NOK 5.2 billion. The largest investments at this point in time were Opera Software, Autoliv and Kone, followed by Assa Abloy, a company with its head office in Stockholm that produces locks and equipment for the security industry, and Hexagon, a global supplier of information technology whose head office is also located in Stockholm.

“These five investments account for approximately 40% of the portfolio”, ends Lars Christian Tvedt.


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