Commentary from the Fund Managers
In October, profit-taking followed interest rate increases, driven by inflation figures from both the U.S. and Europe coming in higher than expected. At the same time, the U.S. economy continued to show resilience, leading many to anticipate that the Federal Reserve (Fed) will be slower to reduce interest rates. The Q3 2024 earnings season concluded with mixed results, with several Swedish listed companies offering cautious outlooks for the fourth quarter.
The Stockholm Stock Exchange declined by 4.0%, while the global index dropped by 2.3%. We expect solid profit growth in 2024, especially heading into 2025. With rapidly declining interest rates, we foresee increased activity in mergers and acquisitions, with valuations particularly attractive among small and mid-sized companies.
Donald Trump's 2024 election victory could produce market effects similar to those following his 2016 win. The U.S. stock market is likely to strengthen, supported by anticipated tax cuts and deregulation that favor American companies. Initially, a protectionist stance may create uncertainty on European stock markets, but in the long term, robust U.S. growth, combined with increased risk appetite, could contribute to continued positive momentum in global markets.
Global Economic Outlook
Supported by falling inflation, rising real wages, and lower interest rates, the global economy continues to show stability. The IMF made minor adjustments to its October forecast, predicting global growth of 3.2% for 2024–2025. Next year's forecast has been slightly revised down from 3.3% to 3.2%. Growth in 2023 stood at 3.3%. JP Morgan's global purchasing managers' index (PMI) for manufacturing rose in October to 49.4 from 48.7 in September, with a PMI above 50 indicating growth.
The U.S. economy continues to show strong growth, with GDP rising by 2.8% in the second quarter of 2024 compared to the same period last year. Additionally, the U.S. consumer confidence index rose to 108.7 in October, up from a revised 99.2 in September.
Employment growth for October was lower than expected, likely impacted by strikes at ports and Boeing, as well as hurricanes that affected the country. Non-farm employment increased by 12,000 in October, which was lower than the expected 113,000. Unemployment remained steady at 4.1% in October, with a gradual increase in unemployment anticipated for 2024–2025. Tax cuts and deregulation are expected to improve growth prospects for U.S. companies.
In Europe, economic indicators remain weak, and growth is low. The EU's economic sentiment indicator (ESI) for the eurozone dropped to 95.6 in October, from 96.3 in September. Unemployment remained stable at 6.3% in September, unchanged from August. The European economy is expected to gradually improve in 2025–2026, as interest rate cuts, rising real wages, and a stable labor market are anticipated to stimulate consumption.
Economic Outlook - Sweden
The Swedish economy remains weak, with GDP decreasing by 0.1% in the third quarter compared to the previous quarter. However, we are seeing early signs of improvement, with rising demand and favorable conditions for a strong recovery in the Swedish economy in 2025. Swedish households are expected to drive growth, mainly through higher real wages, expansive fiscal policies, and rapidly falling interest rates. The purchasing managers’ index (PMI) for Swedish manufacturing rose to 53.1 in October, up from 51.6 in September.
Unemployment has been rising since the summer of 2023 and is expected to continue increasing throughout the rest of 2024. However, with stronger growth projected for 2025–2026, unemployment is expected to gradually decrease.
Interest Rate Market
In October, we saw rising interest rates in the U.S. and Europe, driven by positive economic signals from the U.S. and higher-than-expected inflation. The U.S. ten-year yield rose during the month from 3.73% to 4.28%, while the German ten-year government bond increased from 2.13% to 2.19%, and the Swedish ten-year bond from 1.93% to 2.08%.
The Fed, ECB, and Riksbank all lowered their rates as expected at the latest rate meeting. The Fed reduced its rate by 0.25 percentage points to a range of 4.50–4.75%, the ECB by 0.25 percentage points to 3.25%, and the Riksbank by 0.5 percentage points to 2.75%.
The Riksbank stated: “If the economic and inflation outlooks hold, the policy rate could be lowered further in December and during the first half of 2025, in line with previous communication in September.” Several analysts predict a policy rate of 2.0% during the first half of 2025.
Fund Performance
Kavaljer Quality Focus decreased by 2.1% in October, bringing the year-to-date increase to +14.8%. The corresponding figures for the OMX Stockholm All Share Index (Stockholm Stock Exchange) are -4.0% and +10.7%, respectively.
The fund’s top-performing holdings during the month were Thule, Firefly, and Paradox. The weakest performers were Valmet, Alligo, and ITAB.
Changes and Holdings
During the month, the fund increased its holdings in Alligo, Husqvarna, ITAB, and Storytel, and reduced its holding in Inwido. A new holding is Munters.
The equity allocation was 98%.
