Sweden: Times Are a Changin’

10/13/2006 12:00 am EST


Carlton Delfeld

Editor, The La Jolla Letter and Pacific Gains

Carlton Delfeld has a knack for discovering terrific investment ideas—from a global perspective. Here, he comments on recent changes in the Swedish government and guides investors to a couple of potential opportunities resulting from the upheaval…

“I look at several factors when selecting ETFs, including fundamentals of companies in the ETF basket, capital flows, technical factors, macro indicators, currencies, and so on. But the direction of market reforms which is what politics is all about sometimes rises to the top.

“Think of the Reagan led Republican sweep in 1980 and the significant tax cuts and market reforms in Ireland and Australia, which preceded their strong economic growth and sustained bull markets. Sweden is just such a case. For 65 of the last 74 years and the last 12 years, the center-left Social Democrats have been in control but the center-right opposition led by Mr. Fredrik Reinfeldt mounted an effective campaign for change, including deregulation, tax cuts, privatization, and job creation, and recently won the election.

“Ericsson’s CEO Carl-Henric Svenberg announced his support for change and other key Swedish industrialists followed suit. Sweden’s public sector is 30% of its total workforce (15% in US and EU) and the state oversees 57 businesses with a market value of $70 billion while employing 200,000 people. There was some deregulation of the telecom, auto and banking sectors in the 1990s which led to good growth, but this time the impact and stakes could be much higher.

“Sweden, with a population of nine million and area exceeding that of California, has many attributes for investors. King Carl Gustav has reigned since 1973 over a well-educated citizenry. It is blessed with ample natural resources like iron ore, copper, gold, timber, lead, zinc, and hydro power, but 70% of its economy is driven by services. Per capita GDP is $30,000; it has a balanced budget surplus, current account surplus, opted out of euro in 2003 and has a vigilant central bank (Riksbank), which is targeting an inflation rate of 2%. Sweden’s stock market is also reasonably priced at 12.2 times earnings.

“We have had the Swedish ETF (EWD AMEX) for some time with positive results. This year it is up 14% and over the last 12 months, 19%. Ericsson accounts for 21% of the basket with quality companies like Svenska, Sandvik, Volvo, and Atlas Copco. Capital goods, technology and banking each contribute about 20% of sector exposure. I also recommend some exposure to the Swedish Krona, which I think will marginally outperform the Euro. Rydex has an ETF Currency Shares Swedish Krona Trust (FXS NYSE) which tracks the Krona.”

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