Swedish Manufacturing

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.