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Profit from Europe's top dog

Sweden has bounced back well from the financial crisis. Its currency is strong, but exports are booming - and the economy is growing nicely. However, shares remain good value. David Stevenson explains the reasons behind Sweden's recovery, and tips one cheap stock to buy now.

This week's key day is Wednesday. That's when we'll get the latest Bank of England quarterly Inflation Report which isn't expected to be sweetness and light.

And by then we'll have the lowdown on tonight's US Federal Reserve meeting. Here the rumour is that America's money printing presses are about to be switched back on. As we wrote yesterday, that would be because much of the US economy still looks grim.

But enough gloom for now. A couple of European countries are doing very nicely. We wrote about eurozone winner Germany recently.

Here's the other. And many of its shares are still cheap.

Europe's other Germany

The global financial crisis may have kicked off about three years ago, but the fallout is still very much with us. Any subsequent worldwide economic recovery has been fragile at best. A double dip led down by the Americans looks ever more likely.

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That's why there are many calls around the financial markets for another dose of quantitative easing (QE) from the US Federal Reserve. In other words, for America's central bank to pump lots more dollars into the system with the aim of revving up the economy again.

That's a subject for later in the week when we know the details. But there are a few countries that have done more than all right without playing around with their currencies.

Enter Sweden. In some ways, it's in the same boat as the UK it has its own currency, the krona, yet it's still part of the EU. And recently that financial 'independence' has felt more than slightly uncomfortable.

In the dark days of March 2009 when stock markets were crashing to their lows, investors were searching for anything that seemed a safe haven. And that left the Swedish krona out on a limb. Just like sterling, it plunged against both the dollar and the euro.

But unlike the pound, it has since regained all its purchasing power of three years ago. Meanwhile, despite its recent rally, sterling has lost more than 20% of its value since August 2007.

How Sweden got it right

So what's been so good about Sweden compared with Britain?

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  • Why UK property prices are going to fall 50%
  • When it will be time to get back in and buy up half price property

For one thing, the UK's QE programme has increased the supply of pounds in circulation by £200bn. That's equal to around a seventh of our entire annual output. Sweden, in contrast, has helped out its banks, but hasn't actually created any more krona.

As more currency in circulation increases the supply, it lowers the price. So it's not surprising the krona has done better than the pound.

Then there's the budget deficit the amount a government spends each year compared with its tax take. While Gordon Brown and Co were hocking Britain up to the hilt, the Swedes were playing safe.

Last year the country's budget deficit was just 0.5% of GDP. That compared with the EU average of 6.8%, and the UK's horrendous 11.4% shortfall. Sure, Sweden's government will be letting its foot off the fiscal brakes slightly this year. But its budget deficit is forecast to rise to just 2.1% of GDP, still the EU's lowest.

So that krona rebound is very well deserved. A strong currency is a good barometer of a country's economic health. And it keeps inflation down. That's because as an exchange rate rises, it buys more foreign goods. So the cost of imports falls.

Of course, there's supposed to be a snag with a strengthening currency. It raises the price of a country's exports. So you might expect Sweden's exporters to have suffered on this score.

But they haven't. In fact, the opposite is true. Exports are booming up 17% year-on-year in June and the country is stacking up a healthy trade surplus. Unlike the UK, which despite sterling's slide is still running a chunky trade deficit.

And exports are driving the Swedish economy ahead fast. Second quarter GDP improved by 3.7% on last year. In addition, the expansion looks set to accelerate further. The central bank is forecasting 3.8% growth this year and 3.6% next, while the government sees 2011 matching 2010 for speed. Those are likely to be the best economic numbers in the EU.

What's more, 80% of Sweden's companies reported higher than expected earnings in the last quarter, according to Bloomberg. That's even better than Germany, my favourite eurozone bet, where some two-thirds of firms beat analyst estimates.

What's the secret of the Swedes' success? The answer, says Niklas Magnusson at Bloomberg, is "tapping into Asian and Latin American demand to counter sluggish trade in Europe". In other words, making the type of industrial and capital goods developing economies want.

Further, as well as supplying the fastest-growing export markets, "the strong performance of Swedish companies is due to strong cost controls and high margins", says Hans Peterson at SEB Bank.

A Swedish stock to snap up

On the back of this, you might expect the share prices of Sweden's top exporters to have soared out of sight, and so be very expensive. In fact, they haven't and they aren't.

We'll be writing more soon about the investment opportunities in the country. But for a taster, look at SKF (SEK: SKFB). It's the world's largest ball-bearing maker, selling to automotive and industrial customers. It has just reported its biggest ever quarterly profit. But the shares are only up just over 10% in 2010, and stand on a current year p/e of 13 and a 3% prospective yield. Nico Dil at JP Morgan Cazenove sees the multiple dropping to under 11 next year.

That's hardly expensive. SKF could well enjoy a rerating which would improve the stock price. And if the Swedish krona continues to climb against sterling, you could pick up a handy currency gain too.

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