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Investing in Sweden – A Cold Country with a Hot Economy

Stock-Markets / European Stock Markets Feb 28, 2011 - 06:49 AM GMT

By: Money_Morning

Stock-Markets

Best Financial Markets Analysis ArticleJason Simpkins writes: What comes to mind when you think of Sweden: Blonde hair, pale skin, and a pair of sullen blue eyes piercing through a whiteout - or an economy that grew 5.5% last year?

Too often, it's the former when it should be the latter.


Indeed, chances are you've never thought about investing in Sweden. But the country that is so often thought of as being cold - if it's thought of at all - is actually overheating.

The Swedish economy expanded by 5.5% last year, making it the fastest growing economy in Western Europe. Sweden's central bank, the Riksbank, was the first central bank in the European Union (EU) to raise interest rates. It has lifted its key repurchase rate five times since last July, squelching inflation.

The most recent hike came on Feb. 15 - a 0.25% increase that took the rate to 1.5%. And with the prospect of further rate increases in the short-term, the Swedish krona has risen to its highest level against the euro in 10 years.

Some manufacturers have warned that the soaring currency could undermine the country's export-led recovery, but the Swedish economy is still on pace to grow 4.4% this year.

Additionally, inflation remains low, unemployment is on the decline, and Sweden's national debt is lower now than it was in 2006.

A Swede Turnaround Play
Sweden for a long time was an investment wasteland.

Since World War II, the Swedish economy has been characterized by its extensive and universal social benefits, which are funded by high taxes.

Financial and housing bubbles formed in the 1980s, leading to a crisis in 1990. The country's gross domestic product (GDP) declined by 5% between 1990 and 1993. And in 1992 there was a run on the krona that forced the central bank to hike interest rates as high as 500% in an unsuccessful effort to defend the currency's fixed exchange rate. Total employment fell by almost 11% during the crisis.

Yet the country appears to have learned from its checkered past, as the financial crisis of the past few years has had a relatively small impact on the Swedish economy.
In an op-ed piece that ran in The Local in January, Prime Minister Fredrik Reinfeldt and three of his ministers lauded the country's progress ahead of the World Economic Forum.

"In the wake of the crisis in the 1990s, a number of key foundation stones were laid to ensure that Sweden was on stable ground," they said. "An independent central bank, clear rules for fiscal policy and the pension reform were perhaps the most important elements. The importance of EU membership for the development of both legislation and regulatory frameworks, and ways of thinking, must not be underestimated."

The policymakers - which included ministers of finance, foreign affairs, and international development and cooperation - also acknowledged the role played by deregulation and privatization.

"Crisis-struck countries are now looking to Sweden, to learn from our example," they said. "However, it is not only the cornerstones of the economy that are arousing interest. There is also curiosity about the reform policy to get more people in work that has clearly contributed to the crisis having less of an impact than many expected."

Sweden is one of the few countries to increase its workforce during the financial crisis, adding 100,000 people. Sweden's unadjusted jobless rate was 8.2% in January, as the number of unemployed workers fell by 44,000 year-over-year to 408,000.

What's more is that the costs of the implemented stages of the in-work tax credit and other reform programs have amounted to just 2% of 2011 GDP. Indeed, Sweden's public debt totaled an estimated $42 billion in 2010 - down from $46 billion in 2007 and $52 billion in 2004 and 2005.

Sweden's debt will narrow to 37.5% of GDP in 2012, less than half the EU average of 83.3%, according to the European Commission (EC). Meanwhile, Sweden's debt office said in November that it expects national debt to shrink to 29% of GDP by the end of next year.

Sweden will post a budget surplus of $2.8 billion (18 billion kronor) this year and a $12 billion (78 billion kronor) surplus in 2012, the debt office said.

Next year's estimate includes income of $5.4 billion (35 billion kronor) from state asset sales, as the government continues to its drive towards privatization.

The Swedish government earlier this month sold about a third of its stake in Nordea Bank AB (PINK: NRBAY), the Nordic region's largest lender, recouping $3 billion (19 billion kronor).

"Proceeds from the sale will be used to reduce further the Swedish national debt so as to strengthen the stability of the Swedish economy," said Financial Markets Minister Peter Norman. The government plans to keep reducing its stake until the next election in 2014.

Prime Minister Reinfeldt earmarked Nordea for divestment back in 2006 as part of a broader strategy to sell off assets, including phone company TeliaSonera AB and mortgage lender SBAB.

Exports have been a terrific boon for the Swedish economy as well.

Swedish exports climbed 21% in December from a year earlier, as the nation posted a trade surplus every month last year except August. The country aims to double exports to about $310 billion by 2015, Trade Minister Ewa Bjoerling told Bloomberg News in an interview on Feb. 1.

"Sweden is benefiting from the diversification of their exports," Marc Chandler, the global head of currency strategy at Brown Brothers Harriman & Co. in New York told Bloomberg. "Sweden is a small, open economy that is more dynamic than most of Europe. The krona is a great story," and may appreciate to about 8.5 per euro, he said.

The krona currently trades at about 8.8 per euro.

"At the moment Sweden is a beautiful story," David Bloom, global head of foreign-exchange strategy at HSBC in London, told Bloomberg. "The growth outlook is good, exports are rising, interest rates are moving higher and the budget situation is good."

The Organization for Economic Cooperation and Development (OECD) agrees. It forecast continued strong Swedish growth of 3.9% this year and 3.4% in 2012. The organization also expects the strong growth to continue in 2012 by an additional 3.4%.

"The Swedish economy is strong like Pippi Longstocking," said OECD Secretary General José Ángel Gurría.

Perhaps even more impressive is that the World Economic Forum ranks Sweden second in the world in global competiveness - ahead of the United States and Singapore, and behind only Switzerland.

Sweden benefits from the world's most transparent and efficient public institutions and low levels of corruption, the 2010-2011 Global Competitiveness report said.

"Combined with a strong focus on education over the years (ranked 2nd for higher education and training) and the world's strongest technological adoption (ranked 1st in the technological readiness pillar), Sweden has developed a very sophisticated business culture (2nd) and is one of the world's leading innovators (ranked 5th)," the report said.

Unfortunately, there aren't many avenues available to foreign investors looking to profit from Sweden's turnaround.

LM Ericsson Telephone Co. (Nasdaq ADR: ERIC) is the only Swedish company listed on a major New York exchange. The company last month reported a 172% rise in 2010 net income, which climbed to $1.7 billion (11.2 billion kronar). The increase was the result of better performance at Sony Ericsson, fewer restructuring charges, and a 30% increase in mobile broadband subscriptions.

The iShares MSCI Sweden Index exchange-traded fund (NYSE: EWD) is another way to go. Its top holdings include Nordea Bank, Ericsson, and clothing retailer Hennes & Mauritz AB.

Source : http://moneymorning.com/2011/02/28/...

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