DNB sees oil driving Nordic high yield

Jonathan Boyd
clock • 3 min read

Expectations of continued gains in the price of oil have positioned high yield assets from the Nordic region to perform well through 2017, according to views from portfolio managers at DNB Asset Management.

Last year, the manager’s DNB High Yield fund made gains of 7.62% in NOK terms, or 13.83% in euro terms.

Svein Aage Aanes, head of Fixed Income at DNB Asset Management, said the primary driver has been the recovery in oil. This is because a larger proportion of issuers are linked to the oil industry, particularly in Norway.

Hagen-Holger Apel, senior portfolio manager at DNB Asset Management in Luxembourg adds that “the oversupply of platforms and supply ships and higher oil prices do not mean that the investments of the major oil companies will not decline any further in 2017.”

However, the expectation is that while a low point in the cycle may be reached in 2017, there should be recovery in investments in equipment and services in 2018, which will result in stronger cashflows in the sector.

“After a strong balance sheet recession in recent years, many companies now have a more positive outlook for the next four to five years. Combined with stronger cashflows, this will mean more upside than downside for some bonds from the energy sector,” Apel said.

65 to 80 dollars per barrels

“The further development of the price of oil is a key factor for the Scandinavian high-yield markets. ‘Prospects of further stabilisation of oil prices appear to remain solid for 2017. In our forecasts, we are maintaining our well-established price targets of $65-$80 for the coming 12-18 months,” said Svein Aage Aanes.

DNB’s forecast is for a better balance between supply and demand going forward, which could, for the first time since 2013 result in a global shortage of 300,000 barrels per day, helping to clear out inventories. Open has decided to reduce supply from its members by 1 million barrels per day from January.

“Opec’s decision will not change the situation in the short term, but it will improve market sentiment in the medium term. We continue to see an attractive risk-return set-up in the market,” said Apel.

Even non-Open members are expected to contribute to a cut in output, although this is not guaranteed. Meanwhile, political risks are seen as factors that could lead to lower output from exporters such as Venezuela, Iraq, Libya and Nigeria, while Iran’s status is being questioned in light of the new Trump administration’s threat to the nuclear deal with that country.

Counterbalancing expectations of output cuts is the evidence that oil is being priced at levels that will attract more production in the US, particularly from so-called shale oil. Daily production dropped by 0.5 million barrels per day in 2016 alone in that country. But Donald Trump has appointed a senior oil man, Rex Tillerson, former head of ExxonMobil as his Secretary of State.

“Over the long term, this could of course have an impact on the energy sector and the respective bonds,” said Hagen-Holger Apel.

Currency

As noted, returns from Nordic high yield assets can vary considerably depending on currency risk. DNB estimates that NOK remains undervalued against the euro, but that the local economy suggests it should move higher.

“Supported by higher oil prices, the Norwegian economy will continue to recover,” said Svein Aage Aanes.