I Remain Bearish On Sweden

In the past month, the iShares MSCI Sweden (NYSEArca:EWD) ETF has fallen almost 7 percent from 34.75 to 32.37. The main reason for such a significant drop was the significant contagion of a prior "No" vote by Greece which triggered significant currency uncertainty as a weaker euro would result in a declining level of exports for Sweden.

However, it is important to remember that economic growth has remained quite weak in Sweden up till now and unlike the Eurozone, the country continues to struggle with persistent deflation. With Sweden having recently cut interest rates to -0.35 percent, as consumer spending remains weak as a result of an inflating housing bubble and high levels of household debt.

As a result, we have seen the Swedish krona dip lower in the past month as low consumer spending coupled with low interest rates has reduced demand for the currency:


Based on the above information, I continue to take a bearish view on Sweden's stock market. There are certain countries such as Japan, where the currency and the stock market index have an inverse relationship. For instance, as the yen gets weaker, the Nikkei 225 tends to appreciate on rising exports. I do not see such a situation materializing in Sweden. In fact, Sweden is in a similar situation to that of Canada right now, where low growth is forcing the central bank to cut interest rates which in turn reduces demand for the currency. However, this has not resulted in a rise in stock market performance as Sweden is simply not a globally-oriented export hub such as Japan. In this regard, a weaker currency will not necessarily give the export market a boost of such a magnitude that lifts the country's stock markets higher.

A stronger euro may have certain positive effects of Sweden's export market going forward. However, deflation continues to remain a concern as high household debt levels means consumer spending will remain limited and I expect this to have negative implications for Sweden's stock market. I remain bearish on the iShares MSCI Sweden ETF and expect a breach of the 30 level to the downside in the coming months.

Disclosure:  All views are my own and do not constitute investment advice.

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