In a world economy that has experienced unusually high growth rates and sustained a rapid rise in equity prices for three or more years now, it is becoming harder to find bargains. Luckily, resurgence is happening in unsuspected regions of the world. One such story is Sweden.
The country recorded the highest growth rates in 2006 in Europe at 4.5%. Conservative analysts see a lower growth rate of 3.3% in 2007 and occasionally hedge their bets by adding caveats that an upside surprise is possible.
Sweden has not yet exhausted the growth potential that was repressed as long as it was a socialist welfare state. Over the last ten years, since its moment of truth happened in 1994, it went about reforming its welfare state instead of abandoning it. Public services, such as education and health care, are increasingly offered by private contractors while citizens pay for the services with “vouchers” that the state allocates to them. This helped Sweden to recover from its crisis caused by a near bankrupt government.
In the years since 2001, the Swedish economy’s recovery from the global recession was aided by strong exports, an expansionary monetary policy and a rapid adoption of ICT technologies. Employment did not start rising till late 2005. A growth in money supply of 3% is unsustainable and the Central Bank in Sweden is increasingly adopting a tighter monetary policy. The productivity gains will slow down as adoption of ICT reaches its limits and exports to USA will slow down as well.
The Swedish people are not happy with these accomplishments and voted a center-right party in September 2006. The new Government has scheduled lower taxes on income and wealth beginning January 1, 2007. It also plans to lower the costs of social insurance that employers had to bear. Over a million people feed off Government handoffs with the pretext of ill-health or unemployment. The Government now plans to lower the benefits so that more of them return to the workplace.
In addition, the Swedish Government is planning to privatize Government enterprises and encourage entrepreneurship in an economy that has been dominated by large companies. All these measures raise the probability of positive surprises in 2007. This is bolstered by the overall positive sentiment for the European economies.
The market is pricing in an optimistic scenario, as is evident in the Swedish Exchange Traded Fund (NYSEARCA:EWD). This fund has increased by 7% in value over the last month alone. It is still a steal.
EWD 1-yr chart