DNB Asset Management has drawn a link between the performance of crude oil prices and Nordic high yield instruments through the spring to early summer, suggesting that any sustained oile price recovery combined with lower spreads could benefit investors.
The manager said in a note that its DNB Sicav High Yield fund rose “by 3.1% in March, by 2.7% in April and by a further 1.68% in May”, as the result of a 70% rise in the market price of oil since January.
“Recent months in the high yield segment have been characterised by strong stock price gains and a narrowing of spreads,” said Hagen-Holger Apel, senior portfolio manager at DNB AM in Luxembourg – also pointing to rising optimism about fixed income generally.
The Nordic high yield market is estimated at about €30bn, mainly consisting of Norwegian and Swedish issuers. About half of the bonds originate from issuers linked to the oil and gas industry.
Svein Aage Aanes, head of Fixed Income at DNB AM, said: “The major part of the reduction in oil investments has already taken place. We expect investment levels to bottom out in 2017 and start increasing again thereafter. There is still overcapacity in the industry and profitability will still be low for some time to come but the bottom of this cycle is coming closer and the market always moves before the bottom is reached. There are also other positive elements in the market – the issuers in sub-sectors such as ‘Shipping’, ‘Seafood’ and other export sectors benefit from the weakening of the Norwegian krone, as they generate the majority of their returns in foreign currency.”
Apel added that the manager’s estimates is that the oil price will appreciate to between $65-$80 over the next 18-24 months.
Repercussions from the Brexit continue in the Nordic high yield market as they do in other markets and other asset classes. This, however, set up investors for opportunities, argues Aanes.