iShares MSCI Sweden ETF: Not At This Juncture (NYSEARCA:EWD)
Prices change when events differ from what the market expected them to be. – Peter Bernstein
As noted in last week’s “Leaders-Laggards” episode of The Lead-Lag Report, international stocks haven’t really been able to gain meaningful traction over U.S. stocks. Within International equities, in particular the European region, have proved a difficult terrain this year, with the iShares Core MSCI Europe ETF (IEUR) gives a negative return of 18%. If you thought that was bad enough, how about the iShares MSCI Sweden Capped ETF (NYSEARCA:EWD) which focuses on 47 Swedish stocks, which have fared much worse, giving up a quarter of their market capitalization on a YTD basis.
Given the correction we’ve seen this year, should you consider EWD?
Key themes
Well, to be honest, I don’t think it’s the most suitable time to look at Swedish stocks. Much of the country is well into election fever, and the main event kicks off next month. Historically, stocks rarely tend to provide stable returns when a country is in the middle of election fever. I could understand getting on board if the polls indicated that a certain party was well on its way to winning the election, but that doesn’t seem to be the case in Sweden, as there isn’t much to choose between the contending parties.
It is true that the Social Democrats (S) have managed to gain traction from the last poll in November 2018, but reports from Sweden indicate that there is still no clear coalition that can stake a majority claim. With an ambiguous political environment like this, you can expect Swedish stocks to be hampered by increased volatility.
Just to reiterate my point, also notice how EWD’s standard deviation has increased in recent months and is currently at a rather elevated level of 27.56%
Additionally, as noted in the “Final Thoughts” section of last week’s edition of The Lead-Lag Report, the China/Taiwan rumble has the potential to raise the volatility quotient across global markets and wedge you into a high-bet play such as EWD (beta off 1.24x) is not the most sensible strategy at this time. Separately, if you’re interested in better understanding some of the broader risks that could emerge from recent Chinese tensions, consider listening to my chat with Michael Pettis.
The other major theme worth considering is EWD’s strong exposure to industrial stocks, which account for nearly 40% of total holdings. I have touched on the European energy crisis in a few paragraphs in The Lead-Lag Report, and Sweden is yet another European country that has had to deal with this unpleasant situation. Swedish industry in particular has had to take it on the chin because it has raised their operating cost base in total. Consider the trajectory of producer prices, which are currently growing at a record 25% year-over-year, and much of this is due to pressure in the energy-related products segment, which rose a whopping 82% in June.
It is not just the energy issue. Chinese-related lockdowns have also hit the supply chain, and these industrialists are hardly in the best position to pass on all those costs when consumer inflation in the country has reached its highest point since late80s. In an environment like this, it is no surprise to discover that consumer confidence in Sweden has plummeted to its lowest level in nearly three decades.
Spreading the net beyond industries and consumers, it’s not as if the wider economy is expected to fare well. While GDP growth in the second quarter came in at 4.2%, better than the 0.4% growth in the first quarter, the coming periods will see a dramatic slowdown. The government only expects growth of 1.9% for the fiscal year, meaning H2 is likely to be much slower than the 2.3% growth seen in H1. The slowdown is not expected to stop there, as growth in FY23 is only likely to be even lower 1.1%.
Conclusion
Despite the pronounced decline of EWD this year, relative to its compatriots from Europe, the valuation picture has not improved significantly. EWD still trades at an expensive forward P/E 15xwhich represents a ~27% premium above the corresponding multiple of IEURS. Given some of the other risks I’ve covered in this article, it would probably make sense to sit on the fence at this point.
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