Back in 2015, I argued that Sweden's stock market was significantly overvalued and that rising property prices had threatened to create a significant bubble and potential overheating of the Swedish economy as a whole.
Three years on, how is Sweden doing in this regard?
Firstly, we see that stock market growth in Sweden has significantly lagged behind that of Germany, where the OMX S30 has risen by just over 9% compared to Germany's 32%.
Over the past three years, we see that the OMX S30 has risen/fallen to a price of 1579.45 at the time of writing.
In terms of Sweden's Shiller PE ratio, the country has a PE ratio of 17.0, which is just slightly below the 17.5 ratio for developed Europe as a whole and that of 22.0 for the United States. On this metric, Sweden's stock market is not necessarily overvalued compared to other major markets.
Property prices remain high in Sweden, with property prices being among the most unaffordable in Europe. This is even when one considers that the country has just seen its biggest price slump in over a decade, and this has led to a significant decline in the krona as international investors fear the housing crisis accelerating.
There has been a push by the Swedish government to respond to the housing shortage by implementing further construction, but only time will tell whether this has the potential to be successful.
Aside from the housing crisis, Sweden's household debt is currently the highest in the world at 180%.
That being said, while Sweden has seen a slight decline in its equity market since the beginning of this year, this has largely followed in line with that of Germany.
However, what is interesting is that while inflation rates have been reaching a level of 2%, Sweden still maintains negative interest rates of 0.5%.
We see that negative interest rates are not necessarily stimulating any growth in the equity market, and therefore, this is a concerning sign. Moreover, while financial institutions have taken steps to safeguard their exposure to falling property prices, we have not seen any particular growth in this sector. For instance, if we take a look at two of Sweden's biggest banks - Nordea Bank AB (OTCPK:NRBAY) and Swedbank AB (OTCPK:SWDBY) - their stocks have shown no growth on an overall basis since 2015:
Nordea Bank AB
To conclude, it is hard to make a long-term case for growth in Sweden's stock market at this time. Negative interest rates are failing to stimulate growth, household debt remains inflated, and the housing market is likely to come under further pressure looking forward. I don't necessarily see a lot of downside for the OMX S30, but do not take a bullish view on the index either.
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