There are many who scoff that politics should have much to do with investing. When selecting ETFs for Chartwell’s portfolios, I look at several factors such as 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 with a key election on September 17th. 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 is mounting an effective campaign for change. The issues of deregulation, tax cuts, privatization and job creation are leading his reform agenda.
In January, Ericsson’s CEO Carl-Henric Svenberg announced his support for change and other key Swedish industrialists have followed suit. Sweden’s public sector accounts for 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.
The Kingdom of Sweden, with a population of 9 million and area exceeding that of California, has many attributes which investors should appreciate. King Carl Gustav (no relation) 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. Sweden’s per capita GDP is $30,000 and it has a balanced budget surplus, current account surplus, opted out of euro in 2003 and a vigilant central bank (Riksbank) which is targeting an inflation rate of 2%. Sweden’s stockmarket is also reasonably priced at 12.2 times earnings.
We have had the Swedish ETF (EWD) in some portfolios 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 all top ten holdings that readers might be familiar with. Capital good, 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 (FXS) which tracks the Krona.
The ruling Social Democrats led by Prime Minister Goran Persson are fighting back furiously raising fears of radical change and attacking venture capitalists for calling for change at companies like Volvo. Given Mr. Reinfeldt’s assurances of moving smartly and incrementally and his strong and broad support amongst the business community, his party will be victorious.
Don’t wait until the election later this week, act now.
By Carl Delfeld