Monthly Commentary – February 2023

Jonathan Furelid

Jonathan Furelid


The fund was up 2 % during the month, which is positive considering that the stock market in the USA Nasdaq was down 1 % and MSCI World TR was also down 1.5%. SAAB puts up with a slightly improbable 41 % return during February. It is positive to see that the fund's holdings in cyber security, including Palo Alto and Fortinet, have returned well. On the downside were Boeing and Honeywell, both of which were strongly negative during the month.

Despite a very strong start to the year with a rebound rally, we were reminded during February that the inflation problem remains and, as a result, hawkish central banks that want to act forcefully against inflation. It caused the American stock market to fall at the same time as the Swedish stock market held up better. The inflation data turned out, somewhat surprisingly, to be more persistent than expected and even if inflation is on the way down, it is a real challenge to bring down inflation in the US, Europe and Sweden. This led to the FED, the ECB and the Riksbank raising interest rates and also guided for new increases. Long-term interest rates rose as a result on an international basis, which caused concern in the market.

The interest rate increases also affect the conditions for companies at the same time that the effects of previous increases have probably not fully hit and been absorbed. It also raises questions about whether a soft landing in the US and Europe is still a likely scenario. Despite the fact that companies, both in Sweden and the USA, were predominantly guided down, the companies' share prices have held up well. Of course, this raises questions about the values.

Geopolitical risk stands out as what clearly marked the markets in February, which gives rise to concern going forward.

In February, Russia announced that it was suspending the nuclear agreement with the United States regarding access to controls. Even if it is rhetoric and politics in the action, it is a clear indicator of the deteriorating security policy situation.

The tensions between China and the United States have clearly changed after the conflict with the balloon craft and the tone has been raised among the countries' representatives. China wants to make it clear that the country has the same dignity and importance as the United States globally.

Despite continued and increased support from the West to Ukraine, we see no short-term peaceful solution within reach. Competent assessors do not see that there are prerequisites for peace negotiations right now and above all China's, and to some extent also India's, approach to the conflict is worrying and means that Russia is still functioning economically. It has become clear that all major powers are directly or indirectly now involved in the conflict in Ukraine. China and India stand outside of sanctions and take advantage of the dependence that Russia is now facing and take advantage of securing their own needs and access to energy at the lowest possible cost. That, of course, weakens the sanctions from the West. There is a lack of transparency and time to assess how effective the West's sanctions and price caps will be in the end, but of course it has a clear impact on Russia, but they do not have the same effect as if Russia lacked alternative markets for its energy and raw materials. China wants to establish itself as a global power that takes an active and leading positive in global conflicts and has also offered to act as a peace broker. China has incentives to start world trade as an exporting nation, but China can also profit from the conflict and especially in the relationship with Russia. Russia's new foreign policy means that they are active in new state visits and focus above all on strengthening collaborations, trade routes and access to crucial inputs for their industry. Key partners for Russia are China, India and Iran, and my assessment is that Europe and the US must be decisive, clear and tough against China and India, although the methods of attack against the countries should of course be different. It should be made clear that it should not be possible to cooperate and export on open markets in the West while making sanctions ineffective and appropriating energy at low prices while Europe and the US receive increased costs. India is a poor country in terms of GDP per capita, but is characterized by good growth and positive forecasts. For India, it is about the West providing India with good alternatives to energy and raw materials in combination with investments that are necessary for the country. India is a member of the Quad security pact along with the United States, Japan and Australia, and the pact acts as an important counterweight to China, especially in the South China Sea, the Pacific Ocean and the Indian Ocean.

India is probably not prepared to risk that cooperation and the otherwise good relationship with the West, even if it tries to remain neutral and take part in what both sides have to offer. However, it can have major effects in terms of international capital in the country and export conditions for India and the ambition to take over as the world's factory.

India will be the most interesting country to follow and can play a key role going forward both as a potential locomotive in the economy but also as a key player in terms of security policy. India's economic development is interesting and the fact that several research institutes no longer regard India as a democracy is worrying and difficult for the West.

China has acted as a locomotive in the economy in the past and is no longer able to fulfill that function, despite the fact that it was expected when China began to open up from shutdowns due to COVID-19. The growth targets have been continuously lowered and the country has domestic and structural problems in its economy. In 2022, China reported its lowest growth rate (3 %) since the 1970s, but then, of course, COVID-19 must be taken into account, but the figure is still alarming. In parallel with this, defense appropriations are increased by 7.2%, i.e. higher than GDP growth. This rearmament will of course be a risk indicator in terms of security policy.

How does this affect the fund?

China's rearmament will be met by a need for rearmament in the United States, but perhaps also by the other countries in the Quad.

We do not see a short-term solution to the conflict in Ukraine, but rather Russia as a completely separated pariah state from Europe, which means that the security policy situation will remain elevated for a long time. There will be demands for further investments in defence. In addition to areas of conflict discussed, there are tense situations between India and Pakistan as well as India and China. Diplomatic processes must of course continue and collaborations mainly around the climate issue are extremely important, but they will not affect the need for investments in defence.

It is clear that investment in defense is inevitable and the fund offers good protection for investors in a trend that is otherwise clearly negative for the stock market.

Which companies are next, we feel well positioned in American companies in both defense, space and cyber security but want to increase exposure to Europe and perhaps even more countries internationally. Active work with the fund's analysts, expert advice and the fund's broad network and access to security policy expertise works to find the right companies in Europe to give the fund's investors the right exposure to these trends.

Even if we are moving towards a darker time globally and in terms of security policy, it is clear that investments in defense are something responsible and proactive in order to prevent conflicts from materializing. Furthermore, it is important to protect Western democracies and their central position in world politics, not least in order to realistically manage and cope with the UN's global goals for sustainability.

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Monthly Commentary – January 2023

What a start we had to the stock market year 2023 and positive returns broadly across several asset classes. It has been risk on and risk taking