(Bloomberg) -- The biggest Nordic bank is betting that Swedish stocks have more to give after already breaking through records in recent weeks, despite warnings from some investors that markets are heading toward darker times.
Martin Guri, the chief analyst at Nordea Bank AB in Stockholm, says the Stockholm All-Share Index, which is made up of some 300 stocks, is likely to keep rising in the coming two years as long as the business climate remains good, corporate profits continue to rise and interest rates stay low.
“All factors are unusually stable,” Guri said in a phone interview. “Economic forecasts are in an increasing trend, profit forecasts are also in a rising trend, and there’s no threat from rising interest rates. So it ticks all the boxes.”
As economists have raised their Swedish growth forecasts, analysts have raised earnings estimates for Swedish companies. Bank of America-Merrill Lynch said last month that a global earnings upgrade cycle has begun, with the number of profit upgrades outnumbering downgrades for the first time in six years.
The Stockholm All-Share Index recently topped its earlier records. It’s up 10 percent this year and has added 24 percent in the past 12 months. The benchmark OMXS30 index of Sweden’s most traded stocks is also close to an all-time high. Soaring valuations have enticed more companies to do initial public offerings, with the Swedish market headed toward a record number of listings this year.
The average return potential in the coming 12 months for the 184 companies on the Stockholm All-Share Index that are covered by analysts is 6.9 percent, based on their last price and price targets, data compiled by Bloomberg show.
So far this year, cyclical companies have done well, beating “stable and predictable” stocks, Guri said. For the full year, he expects cyclical companies such as Volvo AB, Sandvik AB and Husqvarna AB to remain among the best-performing stocks.
But the dizzying gains are prompting warnings from some investors.
Thomas von Koch, managing partner of the Nordic region’s biggest buyout fund EQT Partners AB, says markets look overpriced and may be headed for a sizable shock. He cites the heavy reliance on leverage for many asset purchases and the disruption that will come when central banks start unwinding their balance sheets. EQT is doing what it can to prepare its investments “because the storm will come,” von Koch said in an interview last month.
Nordea’s Guri says such warnings might be coming from “buyers looking for a better entry point.” When the business cycle “rolls over is anybody’s guess, nobody knows, but clearly, if someone presses the red button and hell breaks loose, it will change things,” he said.
For now, Guri says all the information he has access to indicates that 2017 and 2018 will be “good years.”
“What I look at, and the way the world looks, the world map, and the overall intelligence that I’ve seen, point to this calendar year and the next looking good,” he said. “Then we’ll see.”