Seeking consensus on Swedish elections

Sweden has continued its reversion to the mean of global politics in recent months as polls show the Sweden Democrats party trading places several times with the Social Democratic Party as the one that will poll most votes in the country’s general election taking place 9 September.

This reflects gains made at local and regional elections over the past few years, as well as increasing gains in the share of the Parliamentary vote in the past two cycles of voting.

The Sweden Democrats party has only been kept out of government hitherto by an agreement between the other key parliamentary parties. This is because SD’s politics have been seen as sufficiently anti-immigrant and nationalistic to put it beyond the centre right, and thus beyond the typical parliamentary consensus building. However, this stance may be increasingly difficult to maintain.

Recently there have been overtures from the Sweden Democrats party to members of the Moderate party, which for decades has formed the backbone of the right of centre vote in the country. Unsurprisingly, the leadership of the Moderate party has rejected
the approach.

MARKET IMPACT

The question for investors, then, is does any of this matter? Well, on the basis of how Swedish stocks have performed historically, the answer is clearly yes.

FE data suggests the Nasdaq OMX 30 gross total return rebased in euros was over 190% in the 20 years to 17 August. That compares with around 137% for the DAX 30, about 109% for the CAC 40, and 83% for the FTSE 100. The importance of Swedish equities to local investors is clear in the proportion of total investment fund industry assets that are held in Sweden equity funds – some SEK659bn (€62.7bn) out of total equity exposure of SEK2.562trn (€243.7bn) and in regard to total industry assets of SEK4.301trn (€409bn) – according to July figures from the Swedish Investment Fund Association.

However, add on Nordic funds – SEK90.5bn – Sweden & Global funds – SEK244.3bn – and Europe funds – SEK110.7bn – as of the latest figures, and it is clear there could be yet higher exposure to the country’s key sectors and companies through equity holdings.
Sifa does not break down its headline figures for fixed income exposure by geography, but here too there is a local twist to such exposure. Swedish and Nordic bond funds from local fund providers offer exposure often to non-rated paper. This is because the companies are locally known, with immediate portfolio manager insight, meaning they are comfortable with the idea of investing via the secondary market in company debt.

Overall, then, the local stock market performs better than others over time – in some cases significantly better – and local investors have significant exposure through their investment funds. That of course is before attempting to calculate the exposure to local assets obtained through mandated pension savings. Sweden’s population is ageing as elsewhere in Europe, which means exposure to domestic assets should be increasing as part of risk profiling implemented as savers near retirement.

Left hand graph summarises voter intentions by the third week of August 2018.
Right hand graph shows Sweden Democrats lead in various individual polls conducted since the beginning of June. This replicates a pattern seen in the summer months of 2017, when it led polls on four occasions in the June-August period. The party had a poll lead on six occasions in the Feb-April period 2017.

PORTFOLIO MANAGER VIEWS

Two of Sweden’s best known Sweden equity managers have given their views on the potential impact of the pending elections. Simon Blecher (pictured below left) manages some SEK20.2bn (€1.92bn) in the Carnegie Sverigefond and Sverige Select – both active Sweden equity funds offered by Stockholm-based Carnegie Fonder. Commenting exclusively to InvestmentEurope, Blecher says his best guess would be for an election leading to a weak minority government, led either by the Social Democratic Party or the Moderate party.

However, there is a slim chance of a minority government under the Centre Party, or even failure to form a government and another election.

“Market concern could come about in respect of it not being clear on election day who will lead the country, and that several parties will claim victory, although it will be highly uncertain who will govern before negotiations actually start,” he says.

“Certainly, one can compare with several other European countries in respect of a fairly new party of dissatisfaction likely to do well in the election and formation of government becoming complicated. But one should not forget that Sweden’s situation is completely different to most of Europe.

“We have very low government debt, a balanced budget that in recent years has shown a surplus, and additionally our own currency. One should also not forget that the power sits with Parliament and not the government.

“Finally, it should be pointed out that large sections of the parties are more similar than they are different and therefore many important questions in recent years have been solved across the blocs, for example, in the agreement over refugees, in questions around defence, energy and pensions.”

Blecher is sanguine about the possible effects on the local stock market. There could be a couple of days of volatility in connection with the election, and interest rates and the krona could be affected – possibly weakening the krona. But, he adds, there have already been significant shifts this year, which suggests that the uncertainty is already priced into the market. Additionally, a weak krona would benefit exporters, which constitute a significant share of the Stockholm Stock Exchange.

GLOBAL FACTORS

Blecher is more concerned by other, more global, factors affecting such companies.

“Given our own currency and large export industry, then of course a global trade war would not be good for Swedish equities. Chaos on credit markets, which could occur when central banks pull back on stimulus at the same time that rates go up, would constitute a financial crisis and general concern, and in such situations the Swedish stock market does worse. A collapse in the property market is another cause for concern, but that is partly priced in and will not spill over into the export industry.”

Companies such as Atlas Copco, ABB, Sandvik and Volvo not only offer investors access to extremely strong balance sheets, but as has already been seen in the case of the splitting of the first name on the list into Atlas Copco and Epiroc, further shareholder value could be released by these businesses being split up in coming years, Blecher says.

Similarly, Skanska could be split into an American and a European part, while a re-rating could push up Essity, which is a business split off from forestry group SCA. SMEs have been doing better than large cap Swedish equity for some time, but Blecher feels they could pause if the market starts to look to enterprise value rather than price/earnings.

Also commenting has been Peter Lagerlöf (pictured below left), portfolio manager on the Lannebo Komplett, Mixfond, Mixfond Offensiv and Nordic Equities funds.

Lagerlöf has worked at the investment banking business of Carnegie, but also Swedbank, the Ministry of Finance and the Riksbank, the country’s central bank. He too points to how complex negotiations may be this time round to form a government.

In previous times this would have constituted a big worry for the market, but he does not feel that elections are any longer as much of a driving force in market performance.

“Since the 1990s crisis, when Sweden really was in trouble, every government has prioritised strong public sector finances. Thanks to that and thanks to the change to the decision making process for the Budget in Parliament made in the 1990s, public sector finance has improved measurably.

“The result is that not only has the market pretty much shrugged off recent elections, but for a relatively small country with an open economy, with a stock market that is dominated by big international industrials, it is the international economy, trade conflicts, etc, that are much more important thatn what Swedish politicians decide,” he says.

”Differences between the different political blocs in Sweden is in reality quite small. I believe the will to compromise to find solutions across the blocs will of necessity be high in the coming mandate period.”

However, there are still some dangers lurking for investors in particular sectors, Lagerlöf adds. He points to the companies active in the welfare sector. With a clear majority supporting the idea that private companies should be allowed, and Parliament rejecting the idea of a ceiling on profits, this could change should the Social Democratic and Left parties do well.

Another is the housing sector, which needs structural changes to deal with an imbalance of supply and demand. There is scope for subsidies or other support being put forward after the election, he suggests.

ABOUT THE AUTHOR
Jonathan Boyd
Editorial Director of Open Door Media Publishing Ltd, and Editor of InvestmentEurope. Jonathan has over two decades of media experience in Japan, Australia, Canada and the UK. Over the past 17 years he has been based in London writing about funds and investments. From editing the newsletter of the Swedish Chamber of Commerce in Japan in the 1990s he now focuses on Nordic markets for InvestmentEurope. Jonathan was awarded Editor of the Year at the Professional Publishers Association (PPA) Independent Publisher Awards 2017. Shortlisted for the same in 2016, he was also shortlisted in 2017 and 2015 for the broader PPA Awards category Editor of the Year (Business Media).

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