Fact: Foreign hedge funds short the SBB share
Property companies such as SBB, whose shares have fallen by more than 80 percent since the turn of the year, have long been among the most shorted on the Stockholm Stock Exchange. Put simply, short selling means that an investor sells a borrowed share, which he hopes to buy back at a cheaper price in the future.
SBB’s financial problems have exploded this year after a series of downgrades. Basically, it is about a high loan-to-value ratio, which looks increasingly unsustainable as interest rates rise.
According to the latest calculation from the Financial Supervisory Authority, the short sale in the SBB share amounts to a total of 18.6 percent. The largest short positions are held by foreign funds:
Samlyn Capital: 4.04 percent
Marshall Wace: 1.61 percent
Arrowstreet Capital: 1.51 percent
Balyasny Europe Asset Management: 1.28 percent
Mirabella Financial Services: 1.25 percent
Qube Research & Technologies ( QRT ): 1.13 percent
Hedge funds in London and New York – specialized in making money from reconstruction – are currently playing with real estate companies in Sweden like a cat plays with a mouse before the prey is killed, according to Lars Kristian Feste.
He sees a risk of major financial problems in the Swedish real estate sector ahead, with major write-downs and new challenges when large loans are converted to higher interest rates.
Someone has to take the loss
The real estate company SBB is worst off, with a share that has fallen by more than 80 percent since the turn of the year and whose bonds can be bought for around one-tenth of the nominal value.
“Sooner or later someone has to take the loss.” I think it will be the companies and their shareholders – and perhaps those who have lent to the companies, says Feste.
— The hedge funds are now grouping together. They aim at reconstructions. They are very professional, used to processes like this – which are very unusual in Sweden, he adds.
Distressed real estate companies have contributed to the Swedish krona being pushed down to historic lows against the euro and the dollar, which in turn provides new inflationary impulses from imports.
Even when it comes to the weak krona, foreign hedge funds play an important role. Although it is about a different type of fund than those that focus on SBB.
— Those who speculate in the krona are called CTAs – that is, Commodity Trading Advisors. They have very broad mandates and can take positions against anything, says Feste.
The interest rate difference most important
At the same time, the appetite for Swedish assets among traditional investors is unusually low. Foreign ownership on the stock exchange was 30-35 percent a few years ago, but is now 5-10 percent, according to Feste. The same thing in the bond market: the foreigners choose Sweden.
Weak growth prospects and major risks due to interest-rate-sensitive households and companies make Sweden look less attractive, according to Feste.
He thinks the Riksbank has set the stage for the crowded situation with ten years of zero or minus key interest rates and massive support purchases of bonds 2015-2021.
— Stefan Ingves (the former governor of the Riksbank) spent almost ten years trying to weaken the krona. Erik Thedéen may now need 5-10 years to regain the market’s trust, says Feste.
But he does not believe that Koran burnings and shootings and other things that are highlighted in the Swedish debate significantly affect the image of Sweden in the market.
“The most important thing is the difference in interest rates compared to other countries,” says Feste.
“The krona is a so-called sloppy currency”
He describes it as that the Swedish interest rate situation and the krone exchange rate are currently out of balance.
— You can have a deviating krone exchange rate and interest for a time. But sooner or later something will happen. Then either the krona has to go down or the interest rates have to be adjusted up, so that there is a balance again, he says.
Feste’s conclusion is that the Swedish economy and the Riksbank must have a clearly higher interest rate than the euro area and the ECB.
— Sweden must be traded with a risk premium compared to Germany. Sweden is a small economy and the krona is a so-called floating currency, sensitive to disturbances, he says.
According to Feste, the fact that Swedish bond yields do not have the same risk premium as the krona is due to the Riksbank’s large support purchases and a limited supply.
— This also applies to Europe, but it is particularly clear in Sweden. This also explains why many foreign actors have chosen to abandon Sweden.