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market insight sweden 2013 q2

Awaiting the ‘Great Rotation’


When our researcher visited Stockholm in April – to consult fund selectors at a range of banks, insurers, pension schemes, funds of funds, family offices and wealth managers – interviewees were wary that events such as this year’s shambolic bailout of Cyprus would continue to spook markets. However, most were sanguine on the global economic environment (see graph 1).

As a result, interviewees were also upbeat on stocks – a continuation of broadly positive sentiment on this asset class since the third quarter of 2012, according to Swedish Investment Fund Association data (see graph 2). While fund selectors noted that the long-awaited ‘great rotation’ was not yet underway, many expected a global shift from bonds to equities to take place soon.

Home bias

Portfolios have a heavy domestic tilt

Swedish equity portfolios are often strongly biased towards domestic securities – a fact reflected in the country’s fund market, where Sweden-specific strategies account for about 70% of European equity fund assets (see graph 3). However, interviewees seek geographical diversification outside of Europe, and some investors achieve this via a blend of Sweden and global equity products only.

Emerging markets

Bullish views on EM stocks

When discussing the major equity regions, Stockholm-based fund selectors were most upbeat on emerging markets – with a net 35% planning to increase their EM allocations over the following 12 months (see graph 4). This was in-line with previous Expert Investor Europe surveys, which have shown a significant and long-standing appetite for developing world equities across the Nordic region.

Fund selectors generally favoured exposure to the BRIC economies over smaller frontier markets. They were particularly enthused by China, despite concerns that labour costs had risen too far – a problem they said had been highlighted in recent months by the decision of some US companies to repatriate jobs from China. In Latin America, only Brazil was of interest.

The US

Fund selectors are upbeat on balance sheets

Swedish appetite for US equity funds jumped sharply in March, as more money flowed into the sector than during the previous 11 months combined (see graph 6).

Our research indicates that demand is likely to continue, with a net 18% of investors actively planning to increase their US stock allocations over the next year (see graph 5). Interviewees viewed the US economy favourably compared with Europe, and were upbeat on the strength of US corporate balance sheets. In sector terms, investors said US healthcare companies were attractive.


Actions by the BoJ stoke interest

Fund flow data shows a similar spike in appetite for Japanese equities at the end of Q1 (see graph 6) and, as with US equities, demand appears likely to continue. Interviewees said Japan had become interesting, following the announcement of radical actions by the country’s central bank to tackle deflation – moves which have prompted a rally of about 30% in the Nikkei 225 Index this year.


Expectations of a two-speed region

Interviewees were bullish on Swedish equities, in part thanks to confidence on the country’s economic resilience (IMF data indicates that the Swedish GDP contracted by 5% in 2009, but rebounded with expansions of 6% and 4% in 2010 and 2011 respectively). While growth rates of just 2% to 2.5% are expected in the years ahead, these compare favourably with the forecast EU average.

However, investors noted that Sweden would be affected by instability in the rest of Europe, and they expected uncertainty on the eurozone to persist. Fund selectors said Europe would grow at different speeds, with Germany and the relatively stable Nordic and Benelux regions outpacing France and southern Europe. As a result, they were not interested in exploring value opportunities in the eurozone periphery and planned to reduce their European exposure in aggregate (see graph 7).

All of our interviewees had UK exposure in their European equity portfolios but none used dedicated UK products. Some fund selectors said they occasionally invested directly in London-listed stocks, focusing on internationally-recognised companies such as mobile telecommunications provider Vodafone.

The proposed FTT

Swedish experience prompts wariness

Sweden introduced a financial transaction tax (FTT) of 0.5% on equities in 1984, later doubling the rate and extending the regime to include fixed income. The tax was widely blamed for reducing trading volumes and increasing market volatility, and was scrapped in the early ’90s. So it is not surprising that interviewees take a dim view of European Commission plans to introduce a similar (although smaller) levy on equity, bond and derivatives transactions, across 11 EU member states.

While Sweden is outside the proposed FTT zone, Stockholm-based investors will be subject to the tax on transactions with parties established in participating states, or which involve instruments issued within the area. Given Sweden’s previous experience with such a levy, interviewees were universally negative on the EU plans but said it would not affect their investment decisions.

Patrik Engström and Will Jackson, members of EIE’s research team, collected the information in this document through a series of interviews with senior fund selectors and asset allocators, plus publicly sourced data. For more information, contact Patrik at or on +44 (0)20 7065 7582. Click here to see upcoming Expert Investor Europe events in Sweden.