Believe me – I never met a tax cut that I didn’t like. So it pains me to learn that a currency safe haven and the strongest economy in Europe right now is – gulp – a socialist country (the state has equity stake in 55 companies) with punishing tax rates! A country with a top tax rate on personal income of 57 percent – the second highest tax rate of all the developed countries in the world!
I just had to find out how a high-tax country managed to have a vibrant economy with five-percent-plus economic growth in 2010 and 2011 while America was growing at an anemic one-percent pace. Even more puzzling is its manufacturing export machine and that it’s home to many successful entrepreneurs as well as great multinational companies.
Aren’t high taxes, stiff regulations and generous welfare benefits the archenemy of economic growth, innovation and risk taking?
Perhaps the next presidential debate should take place in Stockholm?
Why Sweden is Working
My take is that the following Swedish assets more than make up for its crushing tax burdens.
1) Tough-Love Banking Reform
Sweden had its own crushing financial and banking crisis in the 1990s. Its economy actually declined by five percent between 1990 and 1993 and there was a run on the Swedish krona that forced the Central Bank to hike interest rates as high as 500 percent while employment fell by almost 11 percent.
But instead of bailing out the big banks as America did during the global financial crisis, Sweden placed its banks with troubled assets into a so-called bad bank and then they were sold over time when markets recovered. Meanwhile, it used taxpayer money to provide enough capital to help banks to maintain lending. Importantly, Sweden wiped out the existing shareholders in these banks.
2) Better Fiscal Discipline
Since Fredrik Reinhardt’s four-party coalition came to power in 2006, the following pro-growth policies have turned its economy around:
- Public debt and public spending is going the in the right direction – down – bringing its total public debt to half that of the United States and Europe.
- Sweden is posting budget surpluses and raised the retirement age to 67.
- Income taxes have been cut and made less progressive.
- Inheritance and wealth taxes have been reduced.
- The government continues its drive towards privatization with sizable state assets sales.
This is all good stuff, and now I know why I was named after Carl XVI Gustaf, King of Sweden.
Bonus points for Sweden’s Central Bank – the Riksbank – which has a well-deserved hawkish reputation making the Swedish krona a great currency to hedge your U.S. dollar assets. You can easily do this by adding the Swedish krona ETF (NYSEArca:FXS) to your portfolio.
Next, despite all the positive developments in Sweden’s economy, the Eurozone debt drama has led to a 30-percent decline in Sweden’s stock market since May. My advice is to take advantage of this with the iShares Sweden ETF (NYSEArca:EWD) – a basket of first-class multinational companies.
Finally, take a look at today’s Investment U Plus pick – the largest financial company in the Nordic region with 30,000 employees. The Swedish government sold about a third of its stake in it, recouping $3 billion while keeping a 13-percent ownership position.
After the its most recent quarter, the CEO stated that he sees a “very strong trend in our customer business.” The numbers back this up. Net income was up 23 percent year over year. Lending is up 13 percent and deposits up nine percent with assets under management up eight percent so far in 2011. Loan quality is improving and the stock offers a five-percent dividend yield.
Sweden is working.