Focus on Sweden

20 November 2013

While macroeconomic performance fuels optimism, the now extreme dichotomy between the performance of securities and corporate earnings is creating some apprehension at microeconomic level. This is the sentiment that the Kairos Partners team of managers reports back to us, fresh from a recent trip to Scandinavia where the team met with several different local managers.

From a domestic standpoint, prospects for Sweden and its neighbors are indeed still positive overall, although concerns have arisen in terms of the real estate credit mini-bubble that is currently forming, with the central bank having explicitly asked banks to increase the risk weight on loans from 15% to 25%. In this way, the Riksbank was able to prevent a rise in interest rates, which would have penalized growth and risked bringing inflation too close to zero. 

At any rate, the market structure remains closely linked to Europe’s fate: the stock market is dominated by large industrial and retail companies that generate 95% of their profits on the rest of the continent and whose stocks are popular positions in the local alternative industry, Europe’s second largest after London.  The underlying theme characterizing most portfolios is the economic recovery on the continent, including through domestic stocks. The exception is a group of small caps that are more exposed to domestic consumption.

This is why the Fund’s investment level is currently in the high to very high range, in order to exploit the rally of more cyclical securities, should it continue, while overall market risk is generally contained. Equity managers active in this area give relative importance to trading and are adopting a management style based on traditional valuation gauges, with macro analyses that are often wise but almost never decisive for investment decisions. The continued market rally while earnings fall generates entry opportunities on book shorts, which are, accordingly, increasingly important and give rise to limited net exposures within portfolios.


by Mario Unali – Kairos Partners Senior Analyst