How to invest in the safest country in Europe
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Associate Editor
David Stevenson Dec 05, 2011
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Recessions are bad news for everyone. But for government finances, they can be devastating.
When economic growth slows, tax revenues fall. Meanwhile, benefit payouts increase as more and more people lose their jobs. So spending rises, even as income is falling.
Britain’s government was already spending more than it raised in taxes before the crisis of 2008. This annual overspend – the budget deficit – has been made even worse by the slump since then.
Such fast-growing state debts leave a country vulnerable to mood swings in the markets. As Italy has recently shown, if lenders start to fret that a country will never get its finances under control, they will drive up its borrowing costs. This can rapidly push it beyond the point of no return.
But it doesn’t have to be this way. One European government wasn’t caught out by the last recession. In fact, quite the opposite. It’s about to announce a budget surplus for 2011.
And that could make it a very attractive safe haven for your money…
The secret of Sweden’s success
Sweden has become the superstar of the sovereign debt circuit. Because the government is making a budget surplus this year (ie it’s making more in taxes than it spends), the country’s national debt will fall to just above 36% of GDP this year.
Compare that to Germany, which despite its reputation for stoney-faced teutonic prudence, has racked up a national debt of over 80% of its annual output. Or the UK, which on the same measure, is heading for a national debt/GDP ratio of 94% within three years.
So what’s the secret of Sweden’s success? Nothing more complicated than smart money management.
The country has made tough spending decisions. It wasn’t fooled into thinking its government could somehow create extra growth by borrowing more and more. And it’s made the right calls on its commercial banks.
I explained how this worked last month: Invest in a European bank? It’s not as mad as it sounds, so I won’t go over all the same ground in detail again.
In short, Sweden’s central bank, the Riksbank, smelt trouble in early-2009. And unlike the Federal Reserve, the Bank of England or the European Central Bank, the Swedes moved fast.
They put together a comprehensive package to provide more bank capital via a mix of private money and state support. Further, they tightened lending rules for banks even further.
Net result: while banks elsewhere around the developed world are going pear-shaped, Sweden’s lenders look OK. In fact, they’re doing what banks are actually supposed to do – lend money. Without needing a whole bundle of extra state bailouts.
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The safest bond market in Europe
The country’s finances are so good that it’s now enjoying its lowest-ever borrowing costs relative to Germany as investors pile into Swedish bonds. Little wonder – Sweden is now the safest bond market around, reckons Frances Schwartzkopff at Bloomberg.
The chances are high it will stay that way. Normally we’d take official public borrowing forecasts with a large pinch of salt. But Sweden’s Debt Office has a pretty good track record. So when it forecasts budget surpluses through to 2013, we’ll give it the benefit of the doubt.
The ongoing budget surplus also means that the Swedish currency, the krona, is likely to stay strong too.
So how do you take advantage? When it comes to government bonds, a fund is usually the easiest bet for a private investor. There aren’t many such funds around, but leading Swedish bank Nordea does offer one that aims “to preserve the invested capital and to provide a stable rate of return [higher than] the average bond yield in Sweden”. As there’s some currency risk over the short-to-medium term, the recommended minimum investment term is two years. You can find details here.
How to invest in Swedish companies
So that’s the safe haven bit. But how can you get a bit of growth on top of that? The Swedes come up trumps on this score too. They have a great export-driven economy, which is expanding fast.
And despite signs that the rest of the world is slowing down, Sweden continues to beat gloomy forecasts. In the last quarter, the pundits were expecting growth of just 0.4%. In fact, Swedish GDP grew by 1.6%.
Sure, a recession in the eurozone would hurt the country in the short term. Europe is Sweden’s main export market. However, Sweden also has a fine track record of producing the sorts of industrial and capital goods that developing economies want to buy. So it’s superbly placed to cash in on any global upturn.
Further, if the EU’s leaders, along with the Fed, do decide to try money-print their way back to growth, Swedish companies are likely to see the benefit.
So how can you invest in Swedish shares? The iShares MSCI Sweden Index Fund (NYSE: EWD) invests in mainstream Swedish stocks. It trades broadly in line with the value of its underlying assets and the annual expense ratio is 0.55%. I’d consider drip-feeding your money in, as timing your purchase amid the current volatility might be tricky. But the high-quality Swedish story means there should be plenty more long-term growth to come.
• This article is taken from the free investment email Money Morning.
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