NBNKF - EWD Would Be A Bet On An Ailing Sweden

• Sweden is not doing too hot broadly speaking, and slowdowns are evident.
• Moreover, the Riksbank looks ready to live with economic consequences of a rate hiking regime.
• EWD has some nice exposures, and the SEK shouldn't be too weak, but it's a minor currency and the broader Swedish situation could weigh on the ETF.
• However, this is quite well reflected in the multiple and the yield isn't bad, we quite like the exposure.

The iShares MSCI Sweden ETF ( EWD ) is a fairly representative portfolio for the Swedish economy. While it doesn't exactly mirror their export position, it does represent some of the stocks that you'd possibly consider from Sweden's big cap list. Ultimately, the exposures look alright, but of course the Swedish outlook like many other economies are signaling for pain in the medium term. Consequently the multiple is low and the yield is attractive, and we believe attractive enough to warrant interest, just keep in mind the SEK.

A Bit On Sweden

It's good to have updated information on the Swedish situation. In simple terms, they are seeing rate hikes from their Riksbank at a similar pace to the US. While the increases are smaller, there is growing consensus that they will have to speed up from a 0.5% hike to a 0.75% hike, all the way to a 2% reference rate. There is also concern that more will be required, and the Riksbank has signaled a willingness to live with economic pain .

Sweden has a lot of industrial focus, and the effect of inflation on those businesses are mixed, and not necessarily wholly bad. However, heavy industry typically benefits from less uncertainty, as do all industries, and the commitment to fighting inflation seems firm. The rising rates should support the SEK, but the issue is that exorbitant privilege of the USD advantages it over minor currencies and all else equal, the SEK will be weak relative to the USD. This is a negative for investors in this ETF as much of the revenues are Nordic-local, and all those currencies are weaker relative to the dollar.

EWD Breakdown

Consumer confidence is falling substantially in Sweden despite surprise growth figures in GDP. Forecasts are worsening for the Swedish economy with the housing and construction markets being the first to demonstrate weakness, with their outsized impact on households.

However, many of the EWD stocks remain in a decent position, at least from the point of view of valuation, where sentiment seems priced in. High on the holdings list are companies like AB Volvo ( OTCPK:VOLAF ), which has a China exposure problem , but it's producing at a higher rate than guided and managing to meet a larger backlog in trucks. Remember, Volvo no longer sells cars anymore, the car brand was sold.

There is also Nordea ( OTCPK:NRDBY ) which is a stock we quite like. While there is weakness in asset management and the beginning of declines in fee income , the company is mostly exposed to a lending business that seems well positioned in terms of duration and rate structure thanks to all the loan growth happening lately, particularly in housing but also as corporates frontloaded debt raising by trying to pre-empt rate hikes. The company is a cash cow, so a flattening rate of growth is tolerable with yields close to 7%.

Other than that, there are companies that supply industrial machines or fittings and finishings to the housing industry, where there is still pent-up demand. While they all feel the pressure of inflation, they have so far managed to preserve margins mostly with further price increases, where of course the value of those sustained operating profits in real terms do fall.

Conclusions

EWD trades at a 10x PE and a 12m yield around 8%. Yields from Swedish companies are not going to be as reliable as in the US where retirees rely heavily on dividend income, but they will still reflect the operating conditions of the business and their ability to maintain income. In this case, the conditions don't seem primed to deteriorate too badly, where of course the pass through of declining consumer confidence, a factor in every geography, will of course impact revenues in a relatively predictable way. While the companies are solid, industrial Nordic companies, sometimes vaunted businesses that have existed for a century, there is a bit of issues offered for US investors due to FX. The SEK is a disadvantaged currency, as all are, relative to the dollar in a rate hike environment because the USD is a reserve currency while the SEK isn't. If rate hiking has to continue, the SEK will likely trail the dollar further. Many of the industries are rather local, and the SEK decline wouldn't be great for a USD denominated stock account. Nonetheless, it's a well-endowed country with strong industry and well governed, and the multiple reflects much of the risks.

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