After the autumn slump on the Stockholm Stock Exchange, the year-to-date increase is now at +4.5%. Esbjörn Lundevall, SEB’s stock strategist, believes that the tide may be turning.
“In general, I find the current situation on the stock exchange quite exciting,” Lundevall told Placera. “There was a lot of optimism in March about the economic scenario we would face. Since then, expectations have been pushed back. The second half of the year turned out to be worse than many anticipated. However, this does not mean that the recovery will never come. It is more likely that it is just postponed. And right now, the best bet is that 2025 will be a year of recovery, at least.”
Leading indicators have been falling for over two years in both the USA and Europe. For example, “The Conference Board Leading Economic Index,” LEI, has been down for 28 consecutive months, the second-longest decline in over 40 years. The last time this happened was during the Lehman crash and subsequent financial crisis.
“There is much to complain about, but one should not complain about the financial stability of the global financial system at the moment. It looks good, so it is likely that the leading indicators could turn up relatively soon, possibly any month now,” the stock strategist said. “It will take some time before we see this reflected in the company’s quarterly reports. But I believe the market will become more positive towards cyclical sectors as soon as these leading indicators turn upward. Which could happen relatively soon. That’s why I am generally optimistic about the market, especially towards cyclicals. Even though I know things are going very badly right now.”
“The Achilles’ heel of the case”
The engineering sector tends to thrive in a better economic climate, and Lundevall sees Atlas Copco as a favorite company in this sector.
“Ironically, they are one of the cyclical companies with the highest quality and can handle tough times the best. Even though it is still a bit shaky and miserable in the near term, they will likely fare relatively well,” the stock strategist said.
Atlas Copco has also been identified as one of the winners in AI on the Stockholm Stock Exchange, as they have a large portion of their sales in the semiconductor industry.
“A sector where we are even more convinced of an imminent upturn. Especially in the USA. Atlas Copco has a very exciting position to supply equipment to new semiconductor factories there.”
The stock hit an all-time high in June but has since declined. Its performance since the beginning of the year is now worse than the index. Currently, the stock is trading at a forward P/E of 28.
“What is your view on the valuation of Atlas Copco?” Lundevall was asked.
“It is a bit high, as it always is. We have to accept that it is the Achilles’ heel of the case. At the same time, the stock deserves to have a high valuation,” Lundevall replied, stating that he still believes the stock is a buy at these levels.
“Banks are ‘too cheap'”
The central bank began lowering interest rates before the summer with the goal of strengthening the economy and consumers. Lundevall believes that banks are “far too cheap” and that Sweden is a “very exciting” economy to be exposed to.
“Swedbank is the bank with the highest share of revenues in Sweden. What makes us like Sweden is that we see a fairly good development in disposable income for households here,” Lundevall explained.
With proposals for eased amortization requirements as interest rates drop, Lundevall believes that the turnover rate in the housing market will increase. This, in turn, will benefit the banks.
“We believe that the Swedish economy will be strong, and for Swedbank, this likely means better demand for loans and more transaction-related revenues. We think the concerns about the negative effects of lower interest rates are a bit exaggerated, and we believe the stock is too cheap,” he said.
“US-exposed companies benefit”
The economic outlook in the USA is also improving, leading to better performance in US stock markets compared to Europe.
Following Donald Trump’s victory in the presidential election, the market expects deregulation and tax cuts. This benefits domestic companies but also Swedish companies with significant exposure to the US. Two examples are Skanska and Securitas.
“These companies have over 40% of their revenue in the USA. You get a combination of a stronger dollar, which makes profits more valuable, and probably also positive effects from reduced regulations and lower taxes than would otherwise have been the case. So, there are Swedish companies that should be clear winners in an improved US economy.”
Skanska has outperformed the Stockholm Stock Exchange since the summer and is up 18% year-to-date.
“The construction business continues to do very well. But what has been sluggish for some time is the development in-house, both for residential and commercial properties. We see an opportunity for lower interest rates to boost both markets. Maybe not to the extent of a few years ago, but certainly better. This could be a catalyst if they start firing on more cylinders than one,” Lundevall said.
Securitas has performed even better this year, up 33%. Lundevall finds the valuation attractive.
“Most things have been going in the right direction for Securitas, especially with a significant improvement in margins for some time,” he noted.
For Q3, the security company reported an operating margin of 7.5% (6.9), and CEO Magnus Ahlqvist stated that the company was “still determined” to achieve a 8% operating margin by the end of 2025.
“Securitas has also been successful in increasing the proportion of IT-supported services that are less labor-intensive, with higher profitability and better sustainability. It is harder for customers to switch providers than just a doorman. So, we believe that a lot has been going in the right direction for them,” Lundevall commented.
“Do you see any triggers?” Lundevall was asked.
“We believe you can buy it today. But absolutely, we think they will benefit from better developments in the USA. On top of that, there could very well be structural deals. We believe that Securitas will sell two smaller divisions with poor profitability, which has weighed on both growth and margins. So, we think margins will improve, and there will probably be positive reactions to that,” the SEB strategist said.
“Companies with high risk”
If you want to venture further up the risk scale, Lundevall looks at the car manufacturer Volvo Cars and the leisure products company Dometic.
“If you just want maximum exposure to an economic recovery, then maybe Dometic and Volvo Cars are the ones to bet on. But they carry higher risk,” Lundevall cautioned.
Dometic issued a profit warning before Q3, with CEO Juan Vargues expecting the current challenging market conditions to persist for the rest of the year. The stock has plummeted 40% in the first 11 months of the year. SEB still maintains a buy recommendation on Dometic.
“There is certainly a significant upside, but you should be aware that the risk is quite high. I think the risk is too high to highlight it as a favorite option,” Lundevall said.
Volvo Cars’ stock has also fallen, down 30% this year and 65% since its listing in 2021. Lundevall believes the upside potential is even greater here.
“It could probably go up a few hundred percent in a good scenario. But the risk is so high that we do not consider it good enough. We have a hold recommendation on Volvo Cars because there are so many challenges in the near term,” Lundevall concluded.