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Investing Opportunities in Sweden
January 2011
Key Forecasts
Dec-11 Dec-12 Dec-13
3
2
2
3
2
3
Rising Interest Rates

Monetary policy has begun to tighten but is still extremely
“accommodative”. Short-term interest rates are likely to keep rising
through 2011. Bond yields are very low and will probably also rise in the
coming year. The exchange rate has appreciated in the past year and
may be under continued pressure to appreciate further.
Economic activity has rebounded solidly during the past eighteen months
with growth of close to 5%. This has contributed to rising employment and
the redeployment of capital that became idle during the 2008/2009
recession. Spare capacity still exists and the private sector is well placed to
expand further in the coming year. The public sector is also well placed and
will not need to embark upon any marked fiscal tightening. Consumer price
inflation will be higher than in the past two years but ongoing global
competition should see inflation generally remain contained (see table of
key forecasts).
GDP
CPI
Riksbank 3.25
10 year
4.75
5.00
6.00
5.00
6.00
EUR/SEK 8.75
NOK/SEK 1.13
SEK/USD 7.00
8.75
1.13
7.29
8.75
1.13
7.61
90 Day FRA Strips
(%)
4.00
3.00
2.00
The rapid economic rebound and the accompanying commencement of a
tightening cycle by the Riksbank have caused financial market expectations
of short-term interest rates to adjust upwards during the past year (see top
chart). FRA prices indicate that official interest rates are now expected to
increase towards 3% in the coming year. Such an outcome seems plausible
although the risks are skewed towards a more extensive tightening than is
implied by current financial market prices.
Bond yields have been very low in recent years and took another sharp dip
in 2010. Yields have been rising in recent months but they are still very low
by historical standards (see middle chart) and low relative to global bond
yields. If global yields keep rising and Swedish short-term rates increase
further, Swedish bond yields would almost certainly rise as well.
Nevertheless, if inflation remains constrained, any such rise in bond yields
should be limited and a return to the bond yields of the early/mid 1990s
seems highly unlikely.
The krona fell to extremely low levels in 2009 and has since risen against all
major currencies. In trade-weighted terms, it has moved upwards from a
multi-decade low back towards the high point of the past decade (see
bottom chart). The external trade position remains in a sizeable surplus and
if Swedish interest rates rise more rapidly than global interest rates, there
may be pressure on the currency to increase further and head back to the
levels of the mid/late 1990s.
1.00
0.00
+6m
Today
+12m
1 mth ago
+18m
6 mth ago
+2yr
1 year ago
10 Year Bond Yields
(%)
12.00
11.00
10.00
9.00
8.00
7.00
6.00
5.00
4.00
3.00
2.00
Jan-92 Jan-95 Jan-98 Jan-01 Jan-04 Jan-07 Jan-10
Swedish Krona
(Real Trade Weighted Index)
135
125
The equity market has rebounded in conjunction with the improved
economic environment. Firms have been in solid financial shape with the
low level of the krona making them very competitive versus their global
counterparts. With the krona having rebounded, there are few compelling
reasons why Swedish equities should continue to outperform global equities
but the solid position of the corporate sector suggests that ongoing positive
returns are possible.
115
105
95
85
Jan-90
Jan-95
THIS DOCUMENT IS FOR INFORMATION PURPOSES ONLY AND IT SHOULD NOT BE REGARDED AS AN OFFER TO SELL OR AS A SOLICITATION OF AN OFFER TO BUY THE
SECURITIES OR OTHER INSTRUMENTS MENTIONED IN IT. NO PART OF THIS DOCUMENT MAY BE REPRODUCED IN ANY MANNER WITHOUT THE WRITTEN PERMISSION OF
PENRICH CAPITAL. WE DO NOT REPRESENT THAT THIS INFORMATION, INCLUDING ANY THIRD PARTY INFORMATION, IS ACCURATE OR COMPLETE AND IT SHOULD NOT BE
RELIED UPON AS SUCH. IT IS PROVIDED WITH THE UNDERSTANDING THAT PENRICH CAPITAL IS NOT ACTING IN A FIDUCIARY CAPACITY. OPINIONS EXPRESSED HEREIN
REFLECT THE OPINION OF PENRICH CAPITAL AND ARE SUBJECT TO CHANGE WITHOUT NOTICE. THE PRODUCTS MENTIONED IN THIS DOCUMENT MAY NOT BE ELIGIBLE
FOR SALE IN SOME STATES OR COUNTRIES, AND THEY MAY NOT BE SUITABLE FOR ALL TYPES OF INVESTORS.
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