Relative Value in Sweden, and What NOT to Do Right Now

Sweden's relative trade opportunity and what to avoid doing in the most uncertain macro backdrop of the last 50 years.

Relative Value in Sweden, and What NOT to Do Right Now

First time reading Lykeion? Sign up here.


Where to Look in Europe

Before we get in, let me be clear about one thing: I think the rally in European stocks has gone too far, and there’s little incentive in overweighting right now. The Ukrainian counter-offensive, whilst delayed, is still likely ahead of us (more on that next week on Lykeion Research), we’re closer to seeing a pause followed by a pivot in the US (looser financial conditions), and whilst I don’t think that energy will be a problem during most of summer, we should see winter-time energy demand worries from August onwards (bad for volatility).

As we wrote to our research subscribers in March, the future prospects of stock market returns, in general, are quite bleak after a decade-plus of the largest asset bubble in history. In a market that trades sideways, to generate returns, we need to be able to implement relative trades.

Europe versus the US is one of the most common relative trades pitched by analysts. As per Verdad: “Europe generally is cheap. Today, Europe’s CAPE ratio is 20.4x versus 28.2x in the US, according to data from Barclays. This means Europe’s CAPE valuation today is 28% below the US, a discount that is nearly double the 15% historical average discount since 1981”.

As you know, I’m a big fan of Verdad’s work, but the “historical average” benchmark is a bit misleading here simply because since the 1980s so much has changed in the workings of Europe that I don’t think it’s reasonable to look at those 40 years, plot a simple average, and indirectly hint towards mean-reversion.

In fact, after the current rally in Europe, the valuation discount to the US is pretty much in line with that of the last decade-plus (i.e. in line with the post-EU debt crisis discount, which I think better reflects the current reality of Europe), and that is despite (1) a war on the continent (2) the upcoming energy supply volatility in Q3 and Q4 (3) recurrent social unrests in many key countries, with special mention to France who, in theory, was supposed to lead Europe in a post-Brexit post-Merkel world, but is instead seeing protesters storm the Paris offices of BlackRock with flares. Go figure.

So, whilst I’m not truly enthusiastic about Europe, in a relative trade world that’s potentially a good thing. Enter Sweden.

As per Verdad [emphasis added]:

Sweden has, amongst major European countries, the highest 10-year forward growth profile, it’s hedged from the key risk in Europe right now (energy supply), but trades at the lowest premium in more than 20 years. Seems like a good starting point for a relative trade, if you ask me.

We've been reading the Decarbonfuse newsletter to stay up to date on tracking the money, policy, and innovation coming out of the energy and climate world to help look for opportunities in the energy and industrial space.

Daily decarbonization data and news across carbon capture, hydrogen, electrification, and carbon removal.

Check them out here: Decarbonfuse.

It’s All Beta

The big story so far this year has been highlighted in last month’s Update: “The most important market event in Q1 was the pricing of a more dovish Fed going forward. This means the market is chasing long-duration assets (Bitcoin, tech, bonds) as it believes the Fed will soon begin cutting rates. This is a very different market set-up compared to the majority of last year, and more in line with 2020 (post-COVID) and 2008-2019”. Since last month, very little has changed, but here are some key things to consider:

What do we make of all of this?

As Jacob and Roger highlighted in early January, and as Stan Druckenmiller reminded us in his latest Sohn 2023 conference interview, this is easily the most challenging period to have a confident macro forecast in the last 40-50 years.

Said another way, this is no time to be a hero. There will be plenty of great investment opportunities (what Druckenmiller calls “fat pitches”) over the next couple of years (especially for active investors, should the market continue to trade range-bound), and to profit from those, you need to be able to stay liquid and well capitalized.

What this means is that you should probably:

 1. Current Industrial Production (IP) is much weaker

 2. Leading indicators are negative (they were positive during ‘good pauses’)

 3. The yield curve is inverted (it was positively sloped during ‘good pauses’)

 4. The labor market is tighter

 5. Banks are tightening credit conditions significantly (versus easing, or neutral conditions during ‘good pauses’)."

Sometimes, knowing what not to do is more important than knowing what to do.

If you’re not already signed up for our Research tier, here’s a nudge to give it a shot.

Lykeion Research is a once a month report, authored by Jacob Shapiro & Roger Hirst, exploring 5-10 actionable themes at the intersection of Geopolitics and Macroeconomics – the two most important and converging forces of the day.

For example, in last month's report, Jacob gave us a Turkish Election Primer (the results of which are still playing out) where he noted:

"This is the most important election happening in the world in 2023. The results will determine the future of Turkey, one of the most promising emerging market economies in the world despite years of volatile monetary and fiscal policy. The results will also reverberate throughout multiple regions – Southern Europe, North Africa, the Middle East, and Central Asia. More to come over the next months."

We've created this product to be investment grade but priced it for retail ($15/month).

Give it a try and email us anytime to discuss the product - we want to hear it all.

Thanks for reading through! Obviously, none of this is investment advice.

As always, we'll see you out there...

Published in: Markets
Diego Tremiterra

Co-founder and Editor-in-Chief. Covers Markets, Business, and Thematic Oversight. Currently a hedge fund Jr. PM, ex-Goldman Sachs capital markets and startup COO.

View articles

Great! You’ve successfully signed up.

Welcome back! You've successfully signed in.

You've successfully subscribed to Lykeion.

Success! Check your email for magic link to sign-in.

Success! Your billing info has been updated.

Your billing was not updated.