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Global opportunity update: Sweden and Egypt

The Swedish property market


Opportunity overview


Amidst a property crash threatening Sweden's economy, commercial real estate has been hit hard, with several companies cut to junk by rating agencies, and house prices down by around 20% since their peak in March 2022.


The government of Sweden, concerned about the potential fallout, has expressed readiness to intervene and prevent a property market plunge from engulfing the country, potentially leading to interest rate cuts in the mid-term. For investors, cooling inflation and potential intervention may present an opportunity to invest in distressed Swedish real estate companies, anticipating a favourable environment with interest rate cuts in the foreseeable future.


Key drivers


  1. Interest Rate Hikes: Rising borrowing costs reduce the ability of Swedish property companies to continue debt-fueled growth, killing revenue growth rates. Rising interest expense has also eaten into profit margins as payments on variable rate loans increase, and new debt is taken out at higher rates.

  2. Leverage: Many Swedish property companies levered up during the 2021 property boom. This has exposed them to high interest expenses relative to revenues.

  3. Falling Property Prices: The property market experienced a significant downturn, with house prices declining by around one-fifth since their peak in March 2022. Falling property prices has led to asset devaluations and paper losses.

Potential opportunities


Property companies: Many property companies with robust cash flows have experienced paper losses due to asset value revisions and falling house prices. As the property market recovers due to easing inflation creating the possibility of interest rate cuts, Swedish house prices may recover. This would lead to profit spikes in Swedish property companies as they revise their asset values upwards.


Risks


  1. The Swedish property market is currently facing significant uncertainty and volatility due to the ongoing crisis. Property prices may continue to decline, and the recovery timeline is uncertain.

  2. Credit and Liquidity Risks: With high interest rates and overleveraged property companies, there is an increased risk of credit defaults and liquidity issues.

USD/EGP

Opportunity overview


Over the past three months, the official exchange rate of the Egyptian pound has remained fixed at around 30.90 pounds to the dollar. On the black market it has weakened significantly to about 39 pounds to the dollar. This discrepancy in exchange rates reflects acute economic strains in Egypt, characterised by soaring inflation rates which reached a record 35.7% in June 2023.


The continuous surge in inflation along with potential increases in electricity tariffs may put further pressure on the Egyptian pound's purchasing power. This could create opportunities for traders to short the currency, given the ongoing challenges in the country's economy and the potential for further devaluation.


Key drivers

  1. Currency Devaluation and Foreign Exchange Shortage: Since March 2022, Egypt has experienced multiple devaluations of its currency. The shortage of foreign currency has also put strain on the exchange rate, causing a significant gap between the official and black market rates.

  2. High Inflation Rates: The country has been grappling with soaring inflation rates, reaching a record 35.7% in June 2023. This surge in inflation has eroded the purchasing power of the Egyptian pound, putting further pressure on its value from savers buying dollars and falling exports.

  3. Economic Vulnerabilities and IMF Loan Program: Egypt's economic vulnerabilities were exposed after the fallout from Russia's invasion of Ukraine, prompting the country to seek assistance from the International Monetary Fund (IMF) under a $3 billion loan program. However, the first review of the IMF program has been delayed, raising uncertainty over Egypt's commitment to adopting a flexible exchange rate and implementing reforms to boost the private sector.

Risks

  1. Government Intervention: To protect its currency and stabilise the economy, the Egyptian government might intervene by imposing capital controls or introducing policies to influence the exchange rate. Government actions can disrupt the expected trajectory of the currency's devaluation.

  2. The IMF: Any progress or delays in securing assistance from the International Monetary Fund (IMF) loan program or changes in the government's policies can significantly affect the Egyptian pound's performance.


*DISCLAIMER: This article is not financial advice. All views are expressed in the context of research and education. Lion Research does not provide recommendations to readers on whether to buy or sell the securities or investments covered.

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