Most European equity markets have fallen sharply through the first six weeks of 2010, as worries over an escalating crisis in Greece have spread throughout the region. Both broad-based funds and country-specific ETFs are far in the red: the iShares MSCI EMU Index Fund (EZU) has lost more than 10%, while the MSCI Spain Index Fund (EWP) has shed almost 15%. But one European country has come through the crisis relatively unscathed: Sweden.
Focus On Greece
One of the EU’s smallest members has proven to be the most troublesome, as deteriorating public finances in Greece have sent the country’s budget deficit soaring to 13%. These budget concerns are further exacerbated by upcoming debt deadlines: by the end of May, the Greek government will have to refinance nearly $28 billion in debt or face the prospect of a default. In order to combat this and stave off a default and a possible collapse in the euro, extensive spending cuts have been proposed, totaling more than $2.7 billion. However, these cuts have been opposed by some of the general populace, nearly one-third of whom are civil servants. Strikes throughout the country on Wednesday highlighted the delicate nature of the situation.
Sweden Dodges The Euro Bullet
While citizens protest in Athens and fears over sovereign debt defaults spread over the continent, Sweden’s equity markets have been relatively calm. The iShares MSCI Sweden Index Fund (EWD) is only down 2% in 2010, the best performance in our Europe Equities ETFdb Category. A cursory look at the Swedish economy reveals some of the reasons for the resiliency. Sweden has a diversified economy, low levels of economic inequality, and most importantly, its own currency.
The Swedish krona insulated the Nordic economy from the uncertainty that has hit euro zone economies and has been a benefit to Swedish consumers. Since Sweden imports the vast majority of its goods from the countries using the euro but it tends to export to countries outside of the euro-zone such as Norway, the United Kingdom, and the United States, the cost of imports has dropped while exports haven’t become too expensive to foreign consumers. This has translated into a material reduction in the exchange rate over the past five weeks, which could allow Swedish companies to increase their profit margins as long as a cloud hangs over the future of the euro-zone.
Due to the relatively small size of the country and its capital markets, there are relatively few companies in EWD: at last count there about 31 individual securities. This makes for a high concentration of assets into a relatively small number of stocks, as 35% of EWD in Hennes & Mauritz, Nordea Bank, and Ericsson. But from a sector perspective, the fund is relatively well diversified, with the largest allocations towards industrials (26.6%), financials (25.9%), and consumer discretionary (15.7%) sectors.
In addition to outperforming European equities thus far in 2010, EWD has given investors a return of more than 60% over the past 52 weeks. If Sweden is able to prevent collateral damage from its Southern counterparts from impacting its markets, investment in Sweden could continue to be an interesting choice for investors seeking international developed market exposure while avoiding the risk of the euro zone.
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Disclosure: No positions at time of writing.