ETF Pick of the Week: Sweden

The main rationale for recommending iShares MSCI Sweden (EWD), which is weighted only 1% in the MSCI World index, is its relative value despite being right at the top in terms of performance this year – up 33%. Trading at just over ten times earnings, it seems oversold compared with many other European developed markets trading in the mid and high teens as well as some emerging markets such as Mexico at 18 times, Taiwan at 25 times, and India at 21 times earnings.

This is besides the point that Sweden is a high quality, fiscally strong country with top flight multinationals in its ETF basket.

The top company in the Sweden ETF is the telcom equipment maker Ericsson, which accounts for 15% of the basket. Ericsson is a much stronger balance sheet than its peers. Just over 40% of all telephone calls worldwide go through an Ericsson system. Other top companies in the Sweden ETF include Sandvik, Volvo and Atlas Copco. About 50% of EWD’s exposure is to the financial and industrial sectors.

Sweden’s big banks, namely: Nordea, Handelsbanken, SEB, and Swedbank all have some non-performing loan problems especially with their Baltic borrowers but recent earnings reports indicate that the situation is under control. Consumer confidence is now off the lows hit in the first quarter of this year, increasing for the second consecutive month in June and Sweden's business confidence indicator also improved - for the third straight month in June. Retail sales are also climbing albeit from a low base. Another great aspect of Sweden is the he Swedish central bank (Riksbank), the oldest central bank in Europe and is a fierce inflation fighter.

Sweden’s reputation as a big spending, high tax state might also be due for a re-valuation. While government spending, even excluding investment outlays, were boosted from 22% of gross domestic product in 1970 to 30% in 1980, the number has come back down. Sweden’s finance minister Anders Borg is pushing Sweden in the opposite direction, encouraging the legislature to cut taxes, cap spending and privatize parts of health care according to recent Forbes interview.

"If you're working yourselves upwards in taxes and deficits, we're working ourselves downwards," says Borg. In 2009, Sweden's government is projected to have gross financial liabilities equal to 57% of GDP while the debt he debt of U.S. government entities, by contrast, is expected to be 100% GDP by next year, versus 63% in 2007, says the Organization for Economic Cooperation & Development.

Catalyst: The main catalyst is relative valuations and the momentum of Sweden’s market. The recent Swedish banking earnings reports were, on balance, positive and the expected global economic recovery should buoy Swedish companies in the industrial sector.

Tip: You can buy the Swedish Krona through the Swedish Krona currency ETF (FXS).

Risk Factor: The risk factor is medium and I suggest an 8-10% trailing stop loss.

Comments

[Etoile Bril...:]

1. Ericsson is a stock that is traded by 90% of investing Swedes not on rationale but national pride. Beware the bubble.

2. Anders Borg is good but with two years to the election, it will be a miracle if Reinfeld's government can pull off what no other conservative government has ever managed to do - a second term.

3 Swedish banks are in as dire state as the rest of the world's. Not sub-prime but exposure to the Baltic economies.

4. Agree. Sweden's finances are in excellent shape compared with any other OECD economy (Norway and Finland excluded). I'm not sure how that benefits shareholders though.

5. SEK is a yo-yo currency. Whilst the Sweden's budget surplus is still intact, even the Riksbank realises how fragile the curency markets have been /will be. They are forever writing long term FX swaps with the ECB whenever opportunity arises as they realise that should the swap markets dry up again, Sweden and its major companies and bank's have big USD and EUR exposure.

I agree the Sweden ETF looks interesting but beware the risks having an independent SEK brings. This is not a currency of last resort like NOK.

Aug 01 02:51 AM

[Old Trader:]

In addition to the points raised by Etoile above, Volvo is a niche player in autos (possibly less so in trucks), and Atlas Copco is in industrial /capital goods, a still suffering sector. Combining it all, this may be why EWD trades at a discount.

Aug 01 05:23 PM