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1 October 2018, Sweden | Mutual Funds | News

High tide and long-term trends

"It's only when the tide goes out that you learn who has been swimming naked," said US finance guru Warren Buffet, referring to the banks during the financial crisis. It may seem strange to be talking about high tides after one of the driest summers anyone can remember, but it may be more relevant when we look at the financial markets.

From an economic perspective, Sweden is a "small, open and export-dependent nation". A successful industrial nation which, by turning to international markets early on, has successfully built up companies based, initially, on commodities and then, increasingly, on high-tech industry, despite a very limited domestic market. As an industrialised country, Sweden has survived and flourished through two worlds wars, a period of high inflation and subsequent wake-ups with low interest rates and floating exchange rates. Even though many of these companies are today multinational giants in their respective areas, we are sometimes reminded a little of past times and the Swedish economy's dependence on its exports.

Sweden's exports today account for 45 percent of GDP, while that same number in 1980 was 28 percent. This is, of course, balanced with imports of 41 percent today and the equivalent of 29 percent in 1980. We can draw a couple of conclusions. Firstly, that exports as a percentage of GDP have grown vigorously over the past 40 years, despite fairly large relocation of production from Swedish companies to other countries, and secondly that Sweden today has a positive contribution from its international trade. So, despite the feeling that international dependence has decreased alongside the relocation, other goods and services have more than compensated during the period.

When Sweden, after a period of high inflation and associated rising wage costs, lost competitiveness during the 1970s and 1980s, a number of large devaluations were implemented to make Swedish industry internationally competitive again. When high inflation was replaced, through a number of structural measures during the 1990s, with a low inflation environment, the floating and market-priced currency effectively stimulated the Swedish economy during the crises we have experienced since.

TCW – a currency index based on the weights of Sweden's most important trading partners – gives a fairly good picture of the value of the Swedish krona from a competition perspective. After opening with an index level of 100 at the beginning of 1992, the krona weakened by 30 percent by 1995, which of course stimulated Swedish export companies during a domestic property crisis and structural change. After recovering, the krona fell again in 2001 in the wake of the IT crash, followed by another period of stronger currency until the financial crisis. In March 2009, the krona reached its weakest point, with a TCW index of 151, i.e. 50 percent weaker than at the beginning of 1992. In line with the recovery, the krona then strengthened by 25 percent before it began to weaken around 2013. Today have a krona that is at its weakest since 1992, with the exception of two individual months. These months were February and March 2009, when the effects of the financial crisis were greatest for Swedish industry and the need for stimulus was at its highest.

So, what does this have to do with tides? Well, the most important lubricants for financial markets are liquidity and access to finance. Central banks stimulate a weak economy through low interest rates, which drive both investment and consumption. Expansionary monetary policy using low interest rates creates a tidal wave of liquidity, which facilitates all forms of financed operations.

Sweden currently has one of the very lowest policy rates in the world; only Switzerland has a lower rate. Combined with a floating exchange rate, as in Sweden's case, low interest rates also affect the pricing of a currency; there is little interest in investing in a market with such low returns, and investors seek out better placements. This means that Sweden is enjoying maximum monetary stimulus, while export industry is being helped by the weakest currency since March 2009. High tide. In the second quarter of 2018, Sweden had GDP growth of 2.5 percent. Growth last year was 2.1 percent.

The Swedish economy has clearly gained a huge stimulus from the long period of low interest rates. This has supported a booming housing and construction market and has probably contributed to higher consumption of capital goods. Debt is the ultimate proof that Swedes have enjoyed the low interest rates to increase their debt levels. What will happen when the tide goes out?

We have experienced a slowing trend in the housing market even before the Riksbank has stared to raise rates, so this is probably due to a more saturated market and, of course, measures taken such as the requirement to pay down mortgages. The impact of rising interest rates remains to be seen.

In our efforts to manage funds for our customers, we always advocate a sensible and balanced approach to risk. In an environment where long-term trends can be questioned or can change, it is always wise to diversify your investments. At a time when interest rates may have bottomed out, or when heavily stimulated export industry may no longer be supported by a weak currency, conditions may change.

Over long periods of time, it has more or less always paid to go "long" on risk premiums; owning shares and participating in rising profits in a society that, over time, has always moved upward and forward. On the other hand, major turbulence can arise for short periods. We do not make explicit forecasts about the future, and we remain aware that there is always more than one scenario to keep in mind when it comes to economic developments and the impact these can have on your investments. With these arguments, we always advocate an element of alternative investments in a portfolio, with greater opportunities to generate returns even when the tide is going out.


Erik Kjellgren

Head of the Swedish Funds operations
Direct: +46 8 614 25 12

Risk information

Investments in fund units are associated with risk. Past performance is no guarantee of future returns. The money invested in a fund can increase and decrease in value and it is not certain that you will get back the full amount invested. No consideration is given to inflation. The Catella Balanserad, Catella Credit Opportunity and Catella Hedgefond funds are special funds under the Swedish Alternative Investment Fund Managers Act (SFS 2013:561) (AIFM). Catella Sverige Aktiv Hållbarhet and Catella Småbolagsfond may use derivatives, and the value of the funds may vary significantly over time. The value of Catella Sverige Hållbart Beta may vary significantly over time. Catella Avkastningsfond may use derivatives and may have a larger proportion of the fund invested in bonds and other debt instruments issued by individual national and local authorities and within the EEA than other investment funds, in accordance with Chapter 5, Article 8 of the Swedish Investment Funds Act (SFS 2004:46). Catella Nordic Long Short Equity and Catella Nordic Corporate Bond Flex may use derivatives and may have a greater proportion of the funds invested in bonds and other debt instruments issued by individual national and local authorities and within the EEA than other investment funds. For more details, complete prospectuses, key investor information, and annual and half-yearly reports, please refer to our website at or phone +46 8 614 25 00.

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