Continued uncertainty, but light at the end of the tunnel
Despite unstable economic conditions, earnings growth for Nordic listed companies is strong. After more than two years of weak leading indicators, a recovery should not be far off now. That may spark renewed interest in companies in cyclical sectors and small cap stocks. Lower key interest rates will help support both the stock market and the economy, especially highly leveraged companies and economic sectors with credit-driven demand. Meanwhile we see a significant risk that political risks may create turmoil in the market later this year. Valuations are neither attractive nor off-putting and will probably not play a decisive role in stock market performance in the near term. One possible exception is Nordic small caps, which now look relatively attractive; we saw great interest in them earlier this summer. This stock market segment is also more exposed to a likely improvement in the local economy and to lower key interest rates. All in all, we expect continued consolidation in stock market indices for the rest of the year, but with episodes of volatility – much like their performance over the past six months. During this period, leadership in the stock market will rotate from defensive to more cyclically sensitive sectors.
Major upturn around the corner
We continue to believe that a more extensive and sharp rotation towards cyclical stocks is likely when leading indicators turn upwards from their current depressed levels. The Conference Board Leading Economic Index, a compilation of 10 different US leading indicators, has now fallen year-on-year for 28 straight months. Since 1980, the index downturn has only been longer on one occasion – the economic collapse precipitated by the 2008 financial crisis. We see no signs today that the current economic slowdown will lead to a new financial crisis.
A rebound in leading indicators should be imminent, and when these figures start to climb again investors will probably extrapolate the new positive trend relatively fast and factor in a full-scale recovery long before it becomes a reality. Winning sectors in a rotation to cyclical stocks should be industrials, commodities/materials and consumer durables – sectors that have a heavy presence in the Nordic countries.
Swedish companies enjoy an advantage
The outlook is bright for the Swedish economy in 2025. The upturn in global inflation and interest rates after the COVID pandemic years hit Sweden especially hard due to relatively high household debt and mortgages with short interest rate reset periods, which quickly affect the economy when key rates change. This is a significant difference compared to countries such as the US, where a typical mortgage carries a fixed rate for 30 years. The Swedish economy quickly decelerates when interest rates are raised and accelerates when they are lowered.
Along with falling interest rates and lower taxes in Sweden, we believe that mortgage repayment requirements will be loosened, making it easier for people to start new households and re-igniting the housing market again. Rising home prices have other disadvantages, but a higher turnover rate in the housing market is good for economic growth.
We estimate that the average family in the Stockholm metropolitan area will see its disposable income rise by SEK 60,000-100,000 in 2025, from a base of SEK 490,000.
After GDP growth of only 0.5 per cent in 2024, SEB expects the Swedish economy to grow by 2.2 per cent in 2025 and 3.1 per cent in 2026.
As a rule, the large caps that dominate the Stockholm stock exchange have very little exposure to the Swedish market. For instance, heavy equipment manufacturer Atlas Copco generates only 1.3 per cent of its revenue in Sweden. Among major listed companies, essentially only banks offer investors clear exposure to the domestic economy, but there are numerous smaller listed companies with a significant share of their revenue in Sweden. Nonetheless, some companies with a large share of their revenue in Sweden have little or no appreciable impact on the country’s economy, which has been a positive factor in recent years. The downside is that it is now also unlikely they will benefit from the upswing that companies with more cyclical operations will experience. Examples of sectors that fit this description are construction firms and companies with an exposure to construction, consumer durable retailers and companies with many small businesses as customers. Apart from banks, these companies do not weigh heavily in stock market indices, not even in the small cap index, so their impact on these indices will be limited. We believe that companies with an exposure to Sweden are clearly an attractive market segment with good potential for a favourable 2025.
Esbjörn Lundevall
Equity Analyst, Investments