Sweden’s stock market has failed to produce significant growth for some time now. Since 2015, we can see that the OMXS30 is up by just over 4%, while that of the S&P 500 is up by almost 47%:
Back in late 2016, Sweden’s Shiller CAPE ratio stood at 19.8x, which was significantly more than Developed Europe at 15.6x.
Fast forward to today, and the ratio for Sweden stands at 20.8x, while that of Developed Europe is 18.6x.
The rise in housing prices earlier - which I had previously cited as a risk factor - has now seen a decline. Generally speaking, lower housing demand as well as a drop in public spending are expected to see Swedish growth slow to 1.6% this year, down from that of 2.3% in 2018 and marking the lowest rate of expansion since 2013.
The index has seen a significant rise since the beginning of this year - up by 17% from a level of 1400.
While Europe as a whole has had growth concerns, we can see that the returns on the German DAX index have been over double those of Sweden since 2011:
With low levels of economic growth on the horizon, I anticipate that the OMXS30 has seen the majority of its gains for this year. However, in spite of the fact that Sweden’s stock market is indicated to be trading at a higher CAPE ratio than that of Europe as a whole, could we see a situation in the future where Sweden does outperform Europe?
It is certainly plausible, assuming that prices ultimately stabilize in the housing market. One has to remember that Sweden is a significantly large exporter in Europe. For instance, according to the below graph from Trading Economics, we can see that Sweden has grown exports by approximately 35% since 2014, while Germany has grown exports by 22%.
(Source: Trading Economics)
In particular, looking at the index performance as a whole doesn’t necessarily tell the whole story. With cars being ranked as the highest valued export from Sweden at $11.6 billion (and having seen an increase of nearly 30% over the past year), continued growth in the country’s export market has meant stocks such as Volvo (OTCPK:VOLVY) have vastly outperformed the index:
Additionally, we see that over the past three years, the Swedish krona has been weakening significantly against other major currencies, making Swedish exports more attractive:
Here is the breakdown for the OMXS30 along with the top 10 securities by weight:
We see that Industrials and Financials form the highest weighting on the index, both of which are overly exposed to the domestic market.
Let’s take a look at the performance of the top 5 weighted stocks:
We see that Ericsson (ERIC), Volvo (OTCPK:VOLVY), and Assa Abloy (OTCPK:ASAZF) have demonstrated the highest return since 2017, while Hennes & Mauritz AB (OTCPK:HNNMY) has seen a significant decline - potentially due to a slowdown in luxury spending as a result of economic growth concerns.
Therefore, looking at the stock index performance as a whole doesn’t give us the full story. There are stocks that have significantly outperformed others, and my view is that stocks that have a significant export base will be in the best position to thrive. Moreover, a weaker Swedish krona will mean that these companies are at a significant advantage relative to their European competitors.
To conclude, Swedish stocks might lag in the short term due to economic growth concerns. However, a weaker krona will serve as a significant advantage for export-led companies, and I foresee that certain segments of the index will outperform going forward, even if overall index growth remains modest.
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.