STOCKHOLM (MarketWatch) — Residents of this capital radiate a sense of well-being and it’s not only because they live in a beautiful city built on 14 islands that draws comparisons to Venice. It’s also because they call home one of Europe’s fastest growing economies.
The success of this export-oriented Nordic nation is noteworthy, because it’s in stark contrast to the debt woes plaguing Greece, Portugal and other southern euro-zone countries. Sweden is a member of the European Union, but it has chosen to keep its own currency. Public debt levels are relatively low and the government expects a budget surplus this year.
“It’s become interesting for investors who wouldn’t normally think about including Sweden in their portfolios,” said Johan Javeus, chief strategist at SEB. “Good economic fundamentals make the bonds attractive as well as the currency.”
Sweden’s economy contracted sharply during the global downturn in 2008 and 2009, but the subsequent rebound has been just as dramatic, buoyed by strong demand for exports, including machinery, trucks, paper products and iron ore, particularly from emerging markets such as China. For a nation of only 9.4 million people, Sweden punches above its weight in terms of big multinational corporations, which include truck maker Volvo AB /quotes/zigman/177736 SE:VOLVB +0.68% and telecom-equipment giant Ericsson AB /quotes/zigman/178196 SE:ERICB -0.50% . Read more about Swedish stocks.
“We have a big export sector. You can say Sweden is a little Germany,” said Cecilia Hermansson, group chief economist at Swedbank.
Global economy poses risks
As a small, open economy, however, Sweden is affected by global economic turmoil and the recent pace of growth will be hard to sustain, especially given worries about weakness in the U.S. economy and the lack of resolution of the euro-zone sovereign-debt crisis.
A view of Stockholm, the capital of Sweden. Signs of a slowdown are already emerging. Annual growth in gross domestic product was 5.3% in the second quarter after a 6.4% rise in the January-March period. Moreover, the purchasing managers index fell to 50.1 in July from 52.9 in June, signaling industrial production is stagnating.
“The number one risk is the global economy,” Hermansson said. “What’s happening in China and Brazil. A hard landing there would be a disaster for our companies. Europe is the biggest market for Swedish companies. The U.S. is also very important.”
SEB’s Javeus shares that concern. “One issue is whether the Riksbank will continue to hike rates given the situation in Europe and the U.S.,” he said. “That’s the biggest risk — that we would see a markedly weaker global business cycle.”
At its July meeting, the Riksbank, Sweden’s central bank, raised interest rates by 0.25 percentage points to 2% in order to stabilize inflation. The next decision on interest rates is due in early September, with the market starting to doubt that the bank can keep raising rates given the uncertain global outlook.
Swedish Finance Minister Anders Borg, who has been in that role since 2006, reportedly said earlier this month that the nation’s finances will be affected by recent market turmoil and the government expects to lower its growth forecasts for next year. Borg, a member of the center-right minority coalition government of Prime Minister Fredrik Reinfeldt, is credited with solid management of the economy and public finances.
“This is the Swedish mentality — you listen to the rules,” said Simon Blecher, who manages the $1 billion Carnegie Swedish Equity Fund. “We’re not even in the European Monetary Union and we take the Maastricht criteria seriously.”
These criteria determine whether an EU nation is ready to adopt the euro and include budget deficit and national debt rules.
“Sweden has all the fundamentals you wish for as a bond investor, but it’s a small market compared to German bunds and Treasurys,” Javeus said.
“There is a lot of nervousness about an armageddon scenario coming back into the market,” he said. “It’s a smaller economy, and if you want liquid assets, Swedish assets are not the best choice.”
Sweden’s stock market has slumped around 21% this year, as investors have grown increasingly worried about the euro-zone debt crisis and the global economic outlook. Swedish banks have little exposure to debt-laden European countries, but they may potentially be affected by market turmoil since they depend on getting funding from global capital markets. The shares of Swedish banks have dropped this month, along with the rest of the European banking sector.
Meanwhile, the euro has gained 1.7% against the Swedish currency year to date, while the U.S. dollar has fallen 6% against the krona. The outlook for the krona is clouded by the slowing economy and uncertainty regarding further rate hikes by the Riksbank.
“When we had the last recession, the krona traded massively weaker,” Javeus said. “The business cycle effect can weaken the krona a lot.”
/quotes/zigman/177736 Add VOLVB to portfolio SE:VOLVB Volvo AB Series B kr 74.40 +0.50 +0.68% Volume: 15.68MAug. 30, 2011 5:29p
/quotes/zigman/178196 Add ERICB to portfolio SE:ERICB L.M. Ericsson Telephone Co. Series B kr 69.75 -0.35 -0.50% Volume: 10.84MAug. 30, 2011 5:29p
Polya Lesova is chief of MarketWatch’s London bureau.