Is Skanska faced with a worse time ahead?

As measured by the CPI on February 28 in the United States, the inflation rate rose as expected from 7.5% a month ago to 7.9%. The high inflation rate makes it difficult for central banks to navigate their policy rate decisions. However, the Ukraine war has become an argument for not raising interest rates as previously planned.

The logic is that higher prices for raw materials, food, and transport reduce the purchasing power of households and trigger a recession. We would then be back in a phase where central banks would have to stimulate consumers again. At the moment, the best description of the situation is probably approaching a phase of stagflation, a word that experienced investors tend to shudder when hearing. They remember (or have read about) the poor stock performance in the 1970s. A key issue in bringing down inflation is that new energy supplies to Europe could arise mainly from the U.S. and Middle Eastern countries.

What suggests that the economy remains strong is, for example, the strong employment figures in the U.S. last week.

U.S. annual inflation rate from January 31, 2021, to February 28, 2022

Source: Refinitiv Eikon

U.S. 10-year Treasury yields rose from 1.74% on March 4 to 1.99% on March 11. The corresponding increase for the German 10-year yield was from minus 0.076% on March 4 to plus 0.24% on March 11.

Although there are minor progress reports in the ceasefire/peace talks between Russia and Ukraine, it is speculative to believe that the war will end soon. Instead, the Russian rocket attack on a military base in western Ukraine last weekend escalated the conflict. In addition, Chinese junk bond yields have recently risen to record highs. China supports Russia in the Ukraine war, and foreign capital might avoid investing in China for that reason.

U.S. 10-year Treasury yield from June 14, 2021, to March 14, 2022

Swedish property NAV discounts not yet reflected in Skanska

Swedish property stocks have fallen back quite sharply recently, faced with a risk of lower property prices due to rising interest rates. Several leading companies such as Atrium Ljungberg, Castellum, Fabege, and Hufvudstaden are traded significantly below their net asset values. Hufvudstaden shares trade at a 29% NAV discount, close to a record-high. Stock market investors seem hesitant about rental growth for offices and shops in Stockholm's CBD locations. It also affects the other companies negatively.

Skanska's most crucial construction market is in the United States. However, commercial property development accounted for about one-third of the Skanska Group's operating profit in FY 2021. Skanska's property development gains mainly arise in the Nordic region, the UK, Poland, and the Czech Republic. Should real estate prices start to decline due to a higher yield requirement, it would significantly reduce the Skanska Group's ability to generate profits in the Commercial Property division. It would also mean that the Skanska share could fall back again.

Skanska share price (in SEK) from June 23, 2021, to March 14, 2022

The daily chart above shows how Skanska managed to close Monday's trading above MA100. MA50 and MA200 remain as levels of resistance. In the weekly chart below, MA50 serves as the first resistance level. Note how MA200 in the daily chart and MA50 in the weekly chart converge around the same level of 231 SEK.

Skanska share price (in SEK) weekly five-year chart

The full name for abbreviations used in the previous text:

EMA 9: 9-day exponential moving average

Fibonacci: There are several Fibonacci lines used in technical analysis. Fibonacci numbers are a sequence of numbers in which each successive number is the sum of the two previous numbers.

MA20: 20-day moving average

MA100: 100-day moving average

MA200: 200-day moving average

MACD: Moving average convergence divergence