No, Sweden Is Not A Socialist Country. Invest With Caution Anyway

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Includes: AZN, ELUXY, ERIC, EWD, FXS
by: Roger Salus
Summary

The real Sweden defies those who try to label it. Rather than being the "socialist" country many claim, it is far more complex than that.

This Nordic economy features many successful corporations, while presenting many of the same opportunities and challenges associated with more "capitalistic" countries.

Before deciding on whether Sweden warrants a place in an internationally diverse portfolio, investors should at least avail themselves of the myths spread by our political classes.

By now I hope readers recognize that your humble author is an equal opportunity iconoclast. When it comes to political debate there are no guiltless parties (no pun intended). Myths and half-truths are believed and spread by all manner of politicos, ideologues, and media pundits, some innocently, others less so.

No better example can be presented than the endlessly repeated drone about that "socialist" country, Sweden, so described by many a right-leaning commentator (or, contrarily, so praised by many a leaner to the left). Now, to be sure, Sweden is not exactly some Ayn Randian utopia. But socialist? Hardly. From its long history of openness to free trade to its low corporate tax rate to its incubation of some of the world's most successful multinational corporations, Sweden offers much that could potentially excite money-grubbing capitalists everywhere. While the country also possesses attributes commonly associated with the political left, the "socialist" label is crude, reflecting the juvenile mentality of party politics and a sound-byte driven media.

Investors interested in diversifying their portfolios to less traditional jurisdictions should at least think about the opportunities this Nordic economy offers. As we shall see, Sweden is not unlike other developed economies insofar as it presents a mixed bag of potential winners and losers, and is subject to the ups and downs of global prosperity. Ultimately, regardless of whether investors choose Sweden as a destination for their capital, that decision should be based on the fundamentals of individual companies and economic conditions, not on political mythology.

Of Nordic Myth And Reality

In order to expose the political mythology of "socialist" Sweden let us first examine (very briefly, I promise) what socialism is and what it isn't. Indeed, this is precisely where the discussion becomes problematic because it is a difficult concept to define, and has been for over a century. However, there is a core of values and beliefs that can roughly define socialism. Rather than try to paraphrase socialism in my own words, I'll take it right from the horse's mouth:

Socialism is, first, the name given to that form of society in which there is no such thing as a propertyless class, but in which the whole community has become a working community owning the means of production—the land, factories, mills, mines, banks, transport and all the means whereby wealth is created and distributed to the community.

Modern proponents have also added the right of free access to "the goods and services designed to directly meet [the people's] needs." The most typical ideals espoused therefore involve the elimination of private property in place of public ownership, creation of a classless society by equally distributing the fruits of production, and using economic planning as an alternative to capitalism and markets. Other factors, like total unionization of the workforce, are also commonly shared, and could be added to this core. Much of the infighting among avowed socialists has typically had more to do with the means these ends are to be achieved rather than with the ideals themselves. Communists, for example, believe that violent revolution is the inevitable means for the creation of a socialist society, whereas democratic socialists believe that socialism can be achieved via the ballot box.

Somehow, over the course of the last century, socialism slowly came to be confounded with the welfare state. In reality, there is nothing inherently "left-wing" about social programs from an historical perspective. The first social programs were actually instituted by the political right in Germany and France by Bismarck and Napoleon III, respectively. Whether for reasons of realpolitik, noblesse oblige, or cynical electioneering these leaders mutually concluded that providing the working classes with benefits like unemployment insurance was necessary for keeping the peace in a time of increasing social unrest.

Around the turn of the 20th century the previously mentioned democratic socialist movement believed (among other things) that these social programs could be employed to instill socialism by degrees, effectively turning Bismarck's "grand bargain" into the vehicle for a gradual transformation into the very thing it was meant to circumvent. Of course, not everyone believed that welfare states would or should perform this function. Indeed, as the 20th century progressed, welfare states became common features of all Western economies, regardless of whether they were ruled by democratic, monarchical, or dictatorial regimes. Even Mussolini's Italy featured an expansive welfare state. To this day, ostensibly "small government" conservatives routinely support and institute various social programs and social spending when doing so suits them politically.

During the early 20th century, traditionalists from the political classes saw the welfare state's potential use/misuse by democratic socialists, and increasingly became reflexively hostile to social spending of any kind. By mid-century, the cold war had rendered the conversation increasingly stratified. Capital "c" conservatives and many classical liberals began to publicly equate the welfare state with socialism. Democratic socialists for their part did little to alleviate this misinterpretation because, for them, it actually was the path to socialism, at least in their view: the goal was always just a few elections away.

So it came to be that public discussion about government spending and the welfare state became dumbed down, especially once the cold war took root. Fiscal conservatives easily found common ground with foreign policy hawks insofar as both viewed both the Eastern Block and the ideology it represented as existential threats to Western civilization, and subsequently portrayed most every aspect of governmental participation in the economy with suspicion, fear, or hostility (except, of course, for the sacrosanct military). The "new leftists" of the Baby Boomer generation, on the other hand, embodied the exact opposite extreme, parroting the radicalism of their university professors who posited that all things welfare state were good, and the more welfare state the better.

Herein lies the source of the myth that Sweden is a socialist country.

The Swedish Economy: Something For Everyone

That Sweden is famous/infamous for having a vast welfare state is no surprise. Indeed, it has been primarily for this reason that right-leaning pundits have derisively labeled it a socialist country for decades, and conversely it is the reason high school social studies teachers have waxed poetic about its virtuousness for just as long. For brevity's sake your author will paint a more accurate (though admittedly incomplete) picture of Sweden's economy, focusing on areas that defy the labels of our political classes.

The first thing that may surprise political pundits of all varieties is the fact that Sweden has one of the longest traditions of free trade in the world. From the liberalizing efforts of statesman, Johan August Gripenstedt, to the early realization by varied rulers that a relatively small country needs reciprocal commerce with the outside world to compete globally, Sweden has historically been a world leader in pursuing free trade.

Not surprisingly, then, exports are a huge component of the Swedish economy. The most recent figures from the World Bank reveal an exporting powerhouse, with nearly 45% of the economy's GDP tied to exports. This compares well to other major exporters like Germany (46%), South Korea (42%), and Canada (31%). Nor is Sweden a one-trick pony. Its exports include raw materials, finished goods, and leading edge, high-tech innovations.

Exports as a Percentage of Swedish GDP

Source: Trading Economics

The result of over a century of openness to trade and entrepreneurship is that today Sweden is home to some of the world's great multinational corporations. Some are well known, like Ikea and Electrolux (OTCPK:ELUXF) (OTCPK:ELUXY); others are less known beyond their particular niches, like Wrapp. Indeed, there are too many to name here. What all this shows, however, is that Sweden is failing miserably in its alleged attempt to become a bastion of socialism. Companies like Ikea are completely privately owned, while others like Ericsson (NASDAQ:ERIC) trade on global stock exchanges, where they can be purchased and sold by individuals rich or poor, as well as by hedge funds, mutual funds, and ETFs.

That whole "elimination of private property" thing isn't working out so well, either, and nor is that whole "classless society." According to a recent report, Sweden is steadily developing a disproportionately high ratio of millionaires and "high net-worth individuals" (HNWIs) compared to the rest of the world. This is largely due to rising property values and stock markets. Indeed, the Swedes routinely brainstorm various financial innovations; most recently they have birthed the Single Malt Fund, the fund to invest in rare whiskies, and in so doing have simultaneously endeared themselves to your humble author's heart.

Critics will, of course, point to aspects of the Swedish economy they don't like. It is certainly true that Sweden has notably high personal tax rates, currently maxing out at a stomach-turning 57%, compared to 39.1% in the US, 51% in Japan, and 45% in Australia (2015 figures), just for comparison. Now that's a number that could cause the late, great Louis Rukeyser to roll in his grave!

Less known, however, is the fact Sweden also boasts one of the lowest corporate tax rates in the developed world. Yes, really! At 23%, Sweden's corporate tax rate is among the most competitive in the world. In fact, even after President Trump slashed the US corporate tax rate from 38.9% to 25.7%, US corporations still pay a higher rate than those in Sweden! That said, the Swedish government sector is indisputably one of the largest in the developed world, where spending represents 49.6% of GDP, compared to, say, 37.6% for the US, and 39.4% for Japan. However, it is still lower than France at 56.7% and just slightly higher than Germany at 43.9%.

Essentially, what this means is that Sweden does have a generous welfare state, but that welfare state is paid for largely by the individual taxpayers and workers who primarily constitute the principal users of government services. For example, the wealthiest Swedes typically opt out of the public healthcare system in favour of private alternatives. Meanwhile, corporations - the lifeblood of Sweden's economy - are relatively untouched by the taxman (shhhhh... no one tell Bernie Sanders). Now calm, rational citizens are free to debate whether this is a good or bad way of doing things; however, this Nordic economy is certainly like no socialist state that I've ever read about, either in theory or in practice.

A Mixed Bag Of Opportunities

If nothing else, I hope what we've ascertained is that Sweden is in many respects just another developed country. It is not the repressive Soviet gulag some right-wing commentators would have us believe, but neither is it the paradise of blissful rainbow-riding pixies some left-wing commentators would have us believe. But as investors we want to know what opportunities, if any, this Nordic nation provides.

Those who see value in diversifying their portfolios across numerous jurisdictions may wish to look at Sweden as an unconventional destination. In 2017, Sweden's economy grew gangbusters, recording an increase in GDP growth of 3.3%, versus earlier projections of only 2.5%. Indeed, that growth rate is 37.5% higher than that of the eurozone average over the same time period, which experienced unexpectedly high growth of its own. This is double-edged sword, however. As I have shown, with 45% of Sweden's GDP tied to exports - primarily with Europe - Sweden's fortunes are typically linked to those of the continent. All signs are showing that growth in Europe is now slowing, so this year Sweden may not be able to pull off another year like it enjoyed in 2017.

For those wanting direct, broad-based exposure to the Swedish economy the easiest vehicle would be the iShares MSCI Sweden Capped ETF (NYSEARCA:EWD). In the last five years the fund is up a modest 18.4%, but boasting a P/E of 14.5 and a yield of 3.3% it is nevertheless intriguing. The near-term fortunes of the country's primary trading partners, like Germany, Norway, and the UK, will greatly influence the profitability of Sweden's major exporters, and subsequently EWD.

As for individual stocks, investors need to be cautious and do their homework, just as they would with the companies of any country or any stock exchange. Some Swedish corporations like Electrolux, which just happens to be the second-largest appliance-maker in the world after Whirlpool (NYSE:WHR), appear to be good value at current prices. Others like Ericsson and AstraZeneca (NYSE:AZN) appear riskier (though the latter company could have the potential for big payoffs if you have a strong stomach). Meanwhile, Barron's recently published an extremely bullish article on the profitable Swedish banking sector.

Regardless, dear reader, of whether you choose Sweden as a place to invest or whether you ultimately choose to pass, I hope I helped correct some of the misconceptions created by our political class. Sweden is a country that presents opportunities and risks. While its form of governance may or may not appeal to everyone, it is not as radically different as some would suggest. On the micro level, Sweden features a variety of companies with particular strengths and weaknesses, and on a macro level is just as vulnerable to the whims of the global economy as any other nation.

Skål.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.