Carlton Delfeld, editor of Chartwell Global ETF Report, says Sweden has a very productive economy with top-notch companies, and it’s trading at a big discount.

The main rationale for recommending iShares MSCI Sweden (NYSEArca: 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 18x, Taiwan at 25x, and India at 21x 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 (EWD) is the telecom equipment maker LM Ericsson Telephone (Nasdaq: ERIC), which accounts for 15% of the basket. Ericsson has 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 nonperforming 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 Swedish central bank (Riksbank), the oldest central bank in Europe and a fierce inflation fighter. Sweden’s reputation as a big-spending, high-tax state might also be due for a revaluation.

While government spending, even excluding investment outlays, [rose] 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 US government entities, by contrast, is expected to be 100% of GDP by next year, versus 63% in 2007, says the Organization for Economic Cooperation & Development.

The main catalyst, though, 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.

You also can buy the Swedish krona through the CurrencyShares Swedish Krona Trust (NYSEArca: FXS).

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