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Volvo inspires confidence

Most of the world’s major exchanges rose in April, with Stockholm no exception. But while the US markets plough towards record highs, Sweden is 20 percent below last year’s peak.

One reason is exchange rates; one dollar costs less than 8 kronor, compared to 8.80 a year ago. Another is the big decline for Swedish banks, which account for a large share of market capitalisation.
Most of our companies issued interim reports in April, and these were acceptable or slightly above expectations.

Although expectations have fallen alongside weak US numbers in early 2016 and worries about China, some companies seem much more stable than previously.

Volvo is managing a big US decline brilliantly even though production has been cut significantly, which usually leads to weaker profitability. A relaxed management exuded confidence, and Europe’s truck market is strong. China, important for its construction equipment, and Brazil, a big truck market, are already at low levels, so things are unlikely to worsen. And if the US improves sooner or later (the truck cycle has a life of its own) the future looks fairly bright. Cash flow was a bit worse in the quarter, but this is likely to be remedied during the year. The question is whether Volvo will soon be debt-free, making the current market capitalisation of around SEK 200 billion fairly low. This is 10 times operating profit.

Sandvik has also stabilised. Despite a continued weak mining market the company managed to up its margin and the new management has quickly got to grips. New financial targets will be presented at a capital markets day in a few weeks, and possible structural transactions will be discussed.
Our guess is the capital-intensive steel arm will be sold or listed to improve returns and catch up with Atlas Copco.
Banks are suffering from negative interest rates, but the Riksbank and ECB seem to be suggesting this will soon come to an end. Even if the first hikes are not until 2017, banks should have passed the worst this quarter. There should be significant potential as rates return towards zero.
We made no major changes to the portfolio this month.

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Carnegie Sverigefond invests in listed Swedish equities and contains the country’s best and most stable companies. We invest long-term in value companies with sustainable businesses, strong balance sheets and attractive...

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