An early central bank rate cut, coupled with positive GDP forecasts and healthy public finances, should further ease investor concerns over the prospects of the Swedish economy in general – and the property market in particular – Evli’s Chief Investment Officer says.
Sweden is well positioned for a strong economic rebound in 2025, as the rapidly falling inflation paves the way for a shift in both fiscal and monetary policy. GDP fell less than expected last year, and thanks to cautious optimism among households and businesses, market observers have revised their 2024 growth forecast upward from 0.1 to 0.5 percent, followed by a robust 2.8 percent expansion in 2025.
Exports are surprisingly strong given the feeble economic growth in Germany, Sweden’s most important export market. Rising sentiment indicators suggest that exports will continue to grow, perhaps at an even stronger pace, during 2024.
As one of the first central banks in Europe this cycle, Sweden’s Riksbank cut its main interest rate by 0.25 percentage points to 3.75 percent on May 8. The rate cut followed recent similar moves by the Swiss, Czech and Hungarian central banks, and marked the first time the Riksbank has loosened policy ahead of the US Federal Reserve this century.
Expected additional rate cuts combined with expansionary fiscal policy herald a strong recovery in consumption during 2025. Slightly lagging, the labour market is weakening, but not dramatically. Observers expect unemployment to continue rising over the next six months, but when growth picks up in 2025, it will fall back to about today’s levels. A moderate decline in resource utilisation underpins a relatively mild economic slowdown.
The short- and medium-term implications for Swedish equity and bond markets are almost uniformly positive, argues Mikael Lundström, Chief Investment Officer at Evli. “Our positive outlook on Swedish assets rests on a fundamental belief in the strength of the highly diversified Swedish economy and solid government finances with a low debt-to-GDP ratio, 31.2 in 2023.”
As for the stock market, the Riksbank rate cut should bring even sunnier skies, Lundström predicts. “Corporate balance sheets as well as share prices obviously benefit from lower interest rates and falling inflation. A persistently weak Swedish krona bolsters export revenues for Sweden’s large and highly diversified export sector.”
Light at the end of the tunnel
Lundström believes the rate cut should help ease lingering investor worries over the state of the relatively large and, in some cases, highly indebted property sector. “Many investors are still concerned over the state of the Swedish property market, given the dire straits some highly publicized companies found themselves in when central banks across the world embarked on a rate hiking journey on a scale not seen for decades,” he says and adds. “These worries are highly understandable when coming from investors in countries that have just barely come out of the real estate plunge dating back to the financial crisis of 2008/09.”
Sweden and the other Nordic countries, however, never suffered nearly as bad as the European markets ravaged by property and euro crisis over 10 years ago. “Having said that, the Swedish real estate market certainly took a bad hit when central banks embarked on a rarely seen journey of rapid rate hikes in 2020.”
Few sectors are as sensitive to interest rate changes as the property sector when it comes to earnings, borrowing costs and balance sheets. And since Swedish real estate players make up for as much as 40 percent of corporate bond issuances, many feared that refinancing would be a nightmare for some players against the backdrop of rapidly rising interest rates and possible credit crunches.
As it were, Swedish property did not turn out to be the house of cards some feared when interest rates skyrocketed, even if that certainly served to separate the wheat from the chaff by exposing the untenable business models and unsound debt levels of some players. “And”, Lundström adds, “the Swedish property sector is still highly divided between larger, healthy companies and smaller landlords with more specialized business models. But the systemic risks have disappeared.”
Weak krona
As for the weak krona, the fear of imported inflation has been seen as the main obstacle that might prevent the Riksbank from easing their target rate. After the rate cut, the krona slid 0.4 percent against the dollar to SEK 10.90 and 0.3 percent against the euro to SEK 11.71 but has since stabilized on higher levels and proved resilient.
Sweden’s currency is the third-worst performer in the G10 group of most traded currencies this year, down 7.5 percent against the dollar and 5 percent against the euro. Lundström is quick to point out that currency issues need not be of concern to Evli’s clients. “All of our investments on the fixed income side are hedged against adverse currency movements, as the currency market is much more volatile than the fixed income market.”
As for investment decisions, possible sector reallocations and fresh investing, Lundström concludes that, “Now is the time for investors to be a little bolder. I’d say having an overweight in equity is not a bad stance presently. As for fixed income, bond funds are still very attractive too.”
Any particular type of bonds? Lundström reveals that, “Medium-term bond funds with a 2–5 year maturities represent a sweet spot for us. They let you benefit from falling interest rates without taking on a massive risk.”
And he predicts an inflow of cash in all asset classes. “There are lots of money waiting on the sidelines, in bank accounts and invested in short-term securities.”
Let the sunshine in, summer’s just around the corner.
Mikael Lundström
