Swedish Manufacturing

Swedish Manufacturing

15 August 2019 from Mikael Syding

How should you invest in Swedish Industrials when the interest rate curves are inverted?
Today the US interest rate curve (10 years minus 2 years) became inverted for the first time since 2007. The UK interest curve became inverted as well and joins most parts of Europe, including Germany of course. Inverted interest rate curves are one of the most reliable signs of an imminent recession. The fact that the latest inversion took place around 2007-2008, just before the Great Recession and the financial crisis, gives extra emphasis to the warning signal. Not because it is really needed, in view of one PMI report being weaker than the other, in combination with important indicators such as weak trade data in Singapore and South Korea and negative order development for the semiconductor industry.

A soft landing looks unlikely

In addition, several European countries have already reported negative GDP growth. In short, the recession might just be around the corner. For example, central banks' policy rates are already zero or negative in many places, and in the US no more than +2%. Furthermore, most debt measures are at record levels, often well above where they were before the 2008 crisis. On top of that, what dampens the hope of a soft landing, is the low unemployment rate. Without the ability to put a larger proportion of the population to work, or to provide a debt-financed growth push, it is simply time to pay the bill for all artificial stimuli such as earlier work initiatives and consumption in the past decade.

 

 

The bank index has already signaled a recession

The bank index has been extremely weak, and most major banks' share prices have plunged. This particular pattern is usually a reliable sign for an upcoming recession for the entire economy. When things go bad for banks, especially confirmed by a negative interest rate curve, it is because they find it difficult to make money from loans to other corporate sectors that have started to slow down. Since one company's investment is another company's sales, a negative spiral is initiated, whereby resources remain unused in the system. This issue may be alleviated or the spiral reversed through reduced interest rates, but now, this measure is exhausted.

Apparently good manufacturing reports do not fool the market

The Swedish industrial reports were, admittedly, quite positive in several cases. However, it should be considered that the industrials profit from a weak krona. Despite positive reactions to Trump's tweets about an imminent solution to the trade war with China, as well as occasional upturns in connection with the quarterly reports, the largest engineering companies have remained silent or fallen sharply during the last month. Assa Abloy and ABB have managed best, but then we are only talking about a slight increase and in ABB's case only thanks to a change of the CEO. SSAB, Alfa Laval and Sandvik are more representative for the developments of last month. The banks are also at their bottom, so the negative developments are evenly spread across the titles in the OMX, just as you might expect in a recession. In the category “worse than the stock market with declines of 8-12%” we also find the giants Volvo, Ericsson and Electrolux.

Atlas Copco, “Sweden's best company”, developed strongly on and after the reporting date, but has still fallen slightly in the last month, so no company will escape.

Will the SEK remain the winner in the currency war?

Swedish export companies are still favored by the strong dollar and the weak krona. There is also no reason to think that that will change in the near future, so maybe you should buy a manufacturing company after all? One might still be worried about the dollar when China lets the Renminbi pass over the threshold of 7 Yuan per dollar, and the US starts to seriously cut interest rates. However, there is reason to believe that we can trust in the Riksbank with Ingves in the lead to know best how counteract the developments.

Buying opportunity or not? How does a compressed economic cycle with a volatile sideway market sound?

Is it time to buy the Swedish manufacturing and industrials sector or not? Is the recession priced in? Is the accelerating currency war? Investor Anna Svahn usually says that nothing is ever discounted, least of all an ongoing and escalating trade war. I am inclined to agree, especially in this case when profits and values are inflated by both favorable exchange rates and a record-stimulated world. It could possibly be that China's OBOR initiative is pushed forward, but even China has limited room for further stimulation, or for that reason, to utilize its reserves of US government bonds (because then the core capital of their banking system decreases and requires legislative changes to allow for the loan carousel to continue).

Instead, we either have a real recession, or large up- and downturns in share prices ahead of, just as we have seen for the past three years. These swings are driven by combination of news and stimulus cycles, that don’t lead anywhere in the long term. The resulting sideway market compares to an economic cycle that has become five times as short or fast, also a concept taken from Svahn, which places increasing demands on a pragmatic and fast-paced investment strategy when the eligibility for Buy and Keep fades.

Keep your fingers crossed that it is the latter that is being manifested, for a recession with forced sales and debt restructuring could make both 2001-2002 and 2008 appear as badgers among the trash cans compared to finding a hungry bear in the kitchen. Quick-footed or with both hands on the sales button in Swedish engineering companies are your choices in the beginning of the 2020s. Are you ready?

Bull & Bear-Certificates

 Symbol ISINIndex reference instrumentFactorTypeCur.BidAsk 
BULL ALFA X3 VON
DE000VS0M9H4 Alfa Laval AB 3.00 Long SEK 92.09 92.49
BULL ELUXB X3 VON
DE000VS0AJE5 Electrolux AB 3.00 Long SEK 78.29 78.48
BULL ERIC X3 VON1
DE000VF53HH9 Telefonaktiebolaget LM Ericsson 3.00 Long SEK 95.36 95.99
BULL NORDEA X3 VON
DE000VS0AJJ4 Nordea Bank Abp 3.00 Long SEK 51.74 52.18
BULL SANTA X3 VON
DE000VS0AKY1 Banco Santander SA 3.00 Long SEK 10.67 10.76
BEAR ALFA X3 VON
DE000VS0M9K8 Alfa Laval AB -3.00 Short SEK 29.39 29.52
BEAR ELUXB X3 VON1
DE000VF53HN7 Electrolux AB -3.00 Short SEK 62.66 62.81
BEAR ERIC X3 VON1
DE000VF53HP2 Telefonaktiebolaget LM Ericsson -3.00 Short SEK 88.63 89.22
BEAR NORDEA X3 VON
DE000VS0AJK2 Nordea Bank Abp -3.00 Short SEK 13.75 13.87
BEAR SANTA X3 VON
DE000VS0AKZ8 Banco Santander SA -3.00 Short SEK 15.52 15.65
BULL DANSKE X4 VON2
DE000VF661C4 Danske Bank A/S 4.00 Long SEK 62.40 71.03
BULL DNB X4 VON1
DE000VF53G65 DnB NOR ASA 4.00 Long SEK 111.59 116.56
BULL SEBA X4 VON1
DE000VF67PY7 Skandinaviska Enskilda Banken AB 4.00 Long SEK 133.33 134.45
BULL VOLVO X4 VON1
DE000VF58TX0 Volvo AB 4.00 Long SEK 81.29 82.12
BEAR DANSKE X4 VON1
DE000VF53GH1 Danske Bank A/S -4.00 Short SEK 80.29 91.46
BEAR DNB X4 VON1
DE000VF53GS8 DnB NOR ASA -4.00 Short SEK 73.31 76.57
BEAR SEBA X4 VON1
DE000VF67P35 Skandinaviska Enskilda Banken AB -4.00 Short SEK 62.29 62.81
BEAR VOLVO X4 VON1
DE000VF58TJ9 Volvo AB -4.00 Short SEK 93.68 94.81
BULL DANSKE X5 VON1
DE000VF53FX0 Danske Bank A/S 5.00 Long SEK 23.19 27.23
BULL DNB X5 VON1
DE000VF53FY8 DnB NOR ASA 5.00 Long SEK 108.27 114.25

Legal notice

This information is in the sole responsibility of the guest author and does not necessarily represent the opinion of Bank Vontobel Europe AG or any other company of the Vontobel Group. The further development of the index or a company as well as its share price depends on a large number of company-, group- and sector-specific as well as economic factors. When forming his investment decision, each investor must take into account the risk of price losses. Please note that investing in these products will not generate ongoing income.

The products are not capitalprotected, in the worst case a total loss of the invested capital is possible. In the event of insolvency of the issuer and the guarantor, the investor bears the risk of a total loss of his investment. In any case, investors should note that past performance and / or analysts' opinions are no adequate indicator of future performance. The performance of the underlyings depends on a variety of economic, entrepreneurial and political factors that should be taken into account in the formation of a market expectation.

19/10/2019 04:05:40

 

Write a Comment

 

  

 

  

 

* Required fields need to be filled in