Sweden – one of Europe’s most lucrative securities lending markets

Borrowing and lending of equities in Sweden has risen as investors tap into dividends ahead of the results season, according to Data Explorers.

With most eyes on developments in Portugal, Ireland and Greece we will instead take a close-up look at a different European country: Sweden weathered the credit crisis reasonably well, and unlike the UK and Germany it is not facing protests against austerity measures or protest votes in regional elections.

We will look at investor sentiment to see positive views about Swedish banks (Swedbank, Nordea, Svenska Handelsbanken) and some isolated short selling in Electrolux, Oriflame Cosmetics, Melker Schorling and Ericsson.

The first thing to observe is how currently lucrative it is to own and be lending Swedish equities at this moment. With many large cap companies raising their dividends, there is a very strong demand to borrow during this dividend season, which is leading to the weighted average fee to borrow being just under 600bps. This is second only to Finland (also for dividend reasons). The return that securities lending is contributing to the pool of Swedish equities available to borrow (c. $115bn) is a very healthy 16bps on average over the past year.

As highlighted in our weekly research pack, we can observe that institutional investors are adding to their holdings in Sweden’s main banks. In fact, Svenska Handelsbanken, Nordea and Swedbank are all in the top 10 list of European equities with the largest weekly rise in inventory in lending programs. Some, but not all of this, could be funds buying to take advantage of the dividend payouts. In the main, however, Sweden’s banks seem quite healthy as evidenced by Swedbank reporting solid Q4 earnings, a share buyback program and an increased dividend payout.

As always, there are isolated areas of interest for short sellers and the first one to mention is Oriflame Cosmetics. The company offers direct selling of cosmetics and is focused on Eastern Europe. We briefly flagged this up on March 16 when short interest hit a 52 week high. Since then, the percentage of total shares outstanding on loan has since risen a little further to 10.5%. Some sell side analysts are potentially driving this by predicting a less profitable future (“No foundation to cover up this maturing model” is the headline to some recent Nomura research). It is not one way traffic when it comes to sentiment, as the funds who lend are still buying more shares and their holdings are at a 52 week high also.

There has been recent short covering in electronics firm, Electrolux from 13% of all shares in January to 8% in mid March. Short interest has increased once again but this looks related to the upcoming dividend. Despite some short covering, many investors clearly remain negative on this firm, and it remains the biggest directional short in the OMX index.

An entirely different set of reasons justifies rising short selling in Melker Schorling. This quoted holding firm has investments in publicly traded companies such as Hexagon. As such, one imagines there may be arbitrage opportunities between the sum of the parts that it owns and Melker Schorling’s market capitalization. Demand to borrow Melker Schorling remains low in absolute terms but has risen from nothing to 400,000 shares quite recently.

Short interest in Ericsson is rising, but it is not that high at 2.5% of total shares outstanding on loan – a six month high

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