Riksbank's Cut to 3.75% Aids Swedish Builders, Skanska to JM

Key Takeaway

• Riksbank's first interest rate cut in eight years to 3.75% signals a boost for Swedish homebuilders like Skanska AB, Peab AB, and NCC AB.
• The move is expected to stimulate the economy and benefit JM AB significantly due to its focus on residential construction.
• Despite potential currency depreciation, the cut aims at domestic stability, contrasting with the Federal Reserve's cautious rate approach.

Interest Rate Cuts Signal Recovery

Sweden's central bank, the Riksbank, has initiated a series of interest rate cuts, marking its first reduction in eight years. On May 8, 2024, the Riksbank lowered its benchmark interest rate by a quarter point to 3.75%, with indications of further cuts in the second half of the year. This move positions Sweden among the first advanced economies to reduce borrowing costs, ahead of its Eurozone and US counterparts. The decision is seen as a pivotal step towards stimulating the Swedish economy, which has been impacted by global tightening measures and a significant downturn in housing construction activity.

Swedish Homebuilders to Benefit

The Riksbank's rate cut is expected to positively affect Sweden's largest homebuilders, including Skanska AB, Peab AB, and NCC AB. Analysts predict a gradual increase in new starts through 2024, with JM AB poised to gain the most from the reduced rates due to its significant exposure to residential construction. This outlook comes after a challenging period for the industry, characterized by increased bankruptcies among homebuilders, driven by soaring raw material costs and diminished demand. However, recent data suggests a stabilization in the sector, hinting at early signs of recovery.

Economic and Currency Implications

The Riksbank's easing cycle reflects broader trends among global central banks, diverging from the Federal Reserve's more cautious stance on interest rates. This divergence has implications for currency valuations, with the Swedish krona experiencing depreciation against major currencies. The rate cut aims to counteract recessionary pressures within Sweden, emphasizing domestic economic stability over potential currency weaknesses. However, concerns remain regarding the krona's performance and the broader impact of Europe's monetary policy divergence on inflation and import costs.

Street Views

• Albin Sandberg, Kepler Cheuvreux (Cautiously Optimistic on Swedish homebuilders):

  "I would expect new starts to gradually pick up through 2024... it will probably take some time before that turns into stronger demand for new builds."

• Iwona Hovenko, Bloomberg Intelligence (Neutral on the Swedish housing market):

  "Though Riksbank’s rate cut may be the first step in the right direction and help lift buyer confidence, more cuts may be needed to revive the market and meaningfully boost the prospects for Swedish residential-property developers."