Buying Swedish Fish

Position: Long Sweden (EWD); Short Italy (EWI); Short Euro (FXE)

 

Conclusion: Despite the real risks for the Swedish economy to decelerate from 2010 levels (comp pressure, inflation risks, and headwinds for exporters from a stronger Kronor), we think we bought EWD at an attractive price for another quarter of favorable comps and due to the country’s relatively robust outlook versus most of its European peers. While talk from the Riksbank Governor to increase Tier 1 capital ratios of Swedish banks above their peers is alarming, we don’t think it is any more than talk.  

 

We’ve been waiting for the right price to buy Sweden (via the etf EWD) for months, and today we got that price as Electrolux, Sandvik, Scania, and Nordea Bank dragged down the overall OMX 30 equity market (-1.4%) and the etf (-2.8%) on in-line to slightly negative earnings expectations and company concerns over a rising Kronor for exports.

 

Under the hood we’ve liked the fundamentals of Sweden and the Kronor for many months, especially given the volatility on continental Europe associated with its sovereign debt issues. However, and as part of our hesitation to buy Sweden, it’s important to look at the upside and downside risks governing the country’s macro landscape, especially following the estimated (and monster) annual GDP growth of +5.5% last year!

 

Buying Swedish Fish - sw1

 

 

Hawkish Monetary Policy:

 

The Riksbank has proactively raised the benchmark repo four times since July 2010, most recently hiking 25bps in mid-December to 1.25%, in an effort to head off inflation (see chart). While CPI stands at 2.1% in DEC Y/Y, just above the Bank’s 2% target, there’s a real threat due to home price inflation.

  • Swedish house prices  rose for a 20th month in the quarter through December
  • The average house price rose an annual 4% in the three months through December, following a 5% gain in the November quarter as reported last month according to Statistics Sweden

Given, this adds to the likelihood the Riksbank will raise again when it meets next month. 

 

Buying Swedish Fish - sw2

 

 

Consumer Spending Slips:

 

The follow-through of rate increases has equated to a squeeze on household credit and retail sales in recent months:

  • Borrowing rose an annual +7.8% in December, after increasing +8.4% the previous month
  • Retail sales fell -0.8% from November, when they dropped a revised -0.2%. From a year earlier, shop purchases increased +3.1%, versus a +4.6% median estimate in a Bloomberg survey of economists

 

Currency Risk/Reward:

 

The Kronor vs the Euro (SEK-EUR) has seen steady gains (up 13.6% since Feb. 2, 2010) alongside healthy growth over the last 4 quarters (see chart above) and as a flight to safety given the volatility in the EUR due to continental Europe’s sovereign debt issues. As the probability increases that the Riksbank will raise rates again, this an additional bullish catalyst for the currency.

 

That said, and as we saw in the commentary from Electrolux, Sandvik, and Scania today, a strong Kronor erodes export margins. With exports making up more than half of GDP this is a significant concern, and as the table below present, exporting companies contribute heavily to the holdings in the etf:

 

Buying Swedish Fish - sw3

 

 

Banking Rebound vs Regulatory Drag:

 

Statements yesterday from Riksbank Governor Stefan Ingves in which he said that Swedish lenders should “mull imposing tighter standards than those set out by the Basel Committee and enforce the rules faster”, also weighed on the Swedish market today. Nordea Bank CEO Christian Clausen was quick to criticize the remarks due to competitiveness issues vis-à-vis European banks, and rightfully so in our opinion. 

 

You’ll remember that the Swedish banking system is just getting back on its feet.  Grave concerns arose in late 2008 and into 2009 due to its bank leverage to the Baltic states. In July 2010 the major lenders -- Nordea Bank, Svenska Handelsbanken, SEB, and Swedbank-- passed the EU stress tests with a “comfortable margin” according to the Swedish Financial Supervisory Authority, showing a core Tier 1 ratio (a measure of financial strength) in the range of 8.9% to 10.3%.

 

Since then, Swedbank, which return to profit in 3Q10, had a core Tier 1 capital ratio of 13.4% at the end of the 3Q, above the so-called Basel III rules for banks which mandate a 13% level, and compared with the 7% minimum set by regulators. (Basel III rules are scheduled for full implementation by 2019).

 

In short, Swedish lenders look to be well capitalized and cognizant that banks can’t take on the risks they did pre-Lehman, emphasizing the importance of raising tier 1 capital ratios, however not above their European peers as to make Swedish banks less competitive. 

 

Matthew Hedrick

Analyst


7 Tweets Summing Up What You Need to Know About Today's GDP Report

"There's a tremendous opportunity to educate people in our profession on how GDP is stated and projected," Hedgeye CEO Keith McCullough wrote today. Here's everything you need to know about today's GDP report.

read more

Cartoon of the Day: Crash Test Bear

In the past six months, U.S. stock indices are up between +12% and +18%.

read more

GOLD: A Deep Dive on What’s Next with a Top Commodities Strategist

“If you saved in gold over the past 20 to 25 years rather than any currency anywhere in the world, gold has outperformed all these currencies,” says Stefan Wieler, Vice President of Goldmoney in this edition of Real Conversations.

read more

Exact Sciences Up +24% This Week... What's Next? | $EXAS

We remain long Exact Sciences in the Hedgeye Healthcare Position Monitor.

read more

Inside the Atlanta Fed's Flawed GDP Tracker

"The Atlanta Fed’s GDPNowcast model, while useful at amalgamating investor consensus on one singular GDP estimate for any given quarter, is certainly not the end-all-be-all of forecasting U.S. GDP," writes Hedgeye Senior Macro analyst Darius Dale.

read more

Cartoon of the Day: Acrophobia

"Most people who are making a ton of money right now are focused on growth companies seeing accelerations," Hedgeye CEO Keith McCullough wrote in today's Early Look. "That’s what happens in Quad 1."

read more

People's Bank of China Spins China’s Bad-Loan Data

PBoC Deputy Governor Yi says China's non-performing loan problem has “pretty much stabilized." "Yi is spinning. China’s bad-debt problem remains serious," write Benn Steil and Emma Smith, Council on Foreign Relations.

read more

UnderArmour: 'I Am Much More Bearish Than I Was 3 Hours Ago'

“The consumer has a short memory.” Yes, Plank actually said this," writes Hedgeye Retail analyst Brian McGough. "Last time I heard such arrogance was Ron Johnson."

read more

Buffalo Wild Wings: Complacency & Lack of Leadership (by Howard Penney)

"Buffalo Wild Wings has been plagued by complacency and a continued lack of adequate leadership," writes Hedgeye Restaurants analyst Howard Penney.

read more

Todd Jordan on Las Vegas Sands Earnings

"The quarter actually beat lowered expectations. Overall, the mass segment performed well although base mass lagging is a concern," writes Hedgeye Gaming, Lodging & Leisure analyst Todd Jordan on Las Vegas Sands.

read more

An Update on Defense Spending by Lt. Gen Emo Gardner

"Congress' FY17 omnibus appropriation will fully fund the Pentagon's original budget request plus $15B of its $30B supplemental request," writes Hedgeye Potomac Defense Policy analyst Lt. Gen Emerson "Emo" Gardner USMC Ret.

read more

Got Process? Zero Hedge Sells Fear, Not Truth

Fear sells. Always has. Look no further than Zero Hedge.

read more