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Swedish Earnings Signal Biggest Economic Rebound in EU

Eighty percent of Sweden’s biggest companies reported earnings that exceeded analysts’ estimates last quarter, indicating the largest Nordic economy may be headed for the biggest economic rebound in the European Union.

Of the 25 Sweden-based companies on the OMX Stockholm 30 Index, 20 beat the average second-quarter profit estimate from analysts, data compiled by Bloomberg show. That compares with 65 percent of companies that beat analyst estimates on Germany’s DAX Index.

Swedish exporters led by Volvo AB, Alfa Laval AB, SKF AB and Svenska Cellulosa AB, which generate half the country’s economic output, are propelling the recovery as they tap Asian and Latin American demand to counter sluggish trade in Europe. An index of Swedish purchasing managers approached a record high in July, meaning Sweden’s 3.7 percent second-quarter economic expansion may gain pace in the three months through September.

“Exporters are recovering more rapidly from the latest plunge,” said Nordea Bank AB economist Torbjoern Isaksson, in Stockholm. “As the export sector was the hardest hit during the crisis, gross domestic product and capacity utilization are now rising sharply; the strong recovery in the Swedish economy continues.”

EU Outperformer

The second-quarter GDP gain followed a first-quarter increase of 3 percent, which represented the best growth rate in the EU after Slovakia’s 4.8 percent. Sweden’s turnaround may be the biggest in the 27-nation bloc, with the central bank estimating output growth of 3.8 percent this year and 3.6 percent in 2011, erasing last year’s 5.1 percent contraction.

That compares with the European Central Bank’s forecast for economic growth in the euro area of 1 percent this year and 1.2 percent in 2011. The International Monetary Fund expects the euro-area economy to grow 1 percent this year and 1.3 percent next year, saying in a July 21 report that “turmoil has clouded the prospect of a strong regional and global recovery.”

Sweden’s government may raise its economic growth forecasts for this year and cut its outlook for unemployment, Finance Minister Anders Borg said Aug. 5. The government lifted its 2010 estimate on July 5, bringing its official growth forecast to 3.3 percent for this year and of 3.8 percent in 2011.

Smallest Deficit

The government boasts the EU’s smallest budget deficit as a percentage of GDP, allowing Prime Minister Fredrik Reinfeldt to pledge more spending next year if he wins Sept. 19 elections. Sweden’s fiscal shortfall was 0.5 percent last year, compared with an EU average deficit of 6.8 percent. The Nordic country’s deficit will widen to 2.1 percent this year, still the lowest in the 27-member bloc.

The government plans to take advantage of rising asset prices to boost its coffers. Borg last week reiterated budget assumptions that state divestments of stakes in firms such as TeliaSonera AB, Sweden’s largest telephone company, and Nordea Bank AB, the Nordic region’s biggest bank, may generate 100 billion kronor ($14 billion) in 2011 to 2014.

Reinfeldt’s four-party coalition is poised to win a second four-year term, according to most polls conducted since the beginning of July. The government has a 3.3 percentage point lead over the three-party opposition alliance, according to a survey published by pollster Sifo in newspaper Svenska Dagbladet on Aug. 8.

Krona Best Performer

In Sweden, an EU member with its own currency, OMX company earnings topped analysts’ estimates by 22.2 percent on average, Bloomberg calculations show. That’s helped spur a 10 percent surge in the krona against the dollar since the end of June, making it the best performer of the 16 major currencies tracked by Bloomberg in the period.

SKF, the world’s largest maker of ball bearings, reported its biggest-ever quarterly profit, led by sales to automotive and industrial customers. The Gothenburg-based company’s profit jumped four-fold to 1.41 billion kronor from 314 million kronor a year earlier. Volvo, the world’s second-largest truckmaker, had profit of 3.15 billion kronor, compared with a loss of 5.57 billion kronor a year earlier. Analysts surveyed by Bloomberg were predicting the company would earn 2.32 billion kronor.

“The strong performance of Swedish companies is due to their exposure to strong export markets combined with strong cost controls and high margins,” said Hans Peterson, global head of investment strategy at SEB Bank AB in Stockholm. “Sales are in many cases still at low levels compared with 2007 and therefore, stable growth going forward is a blessing for Swedish exporters, which make up a large part of the market.”

Export Growth

Export growth gives the Riksbank more scope to continue raising interest rates, even as other European nations struggle with budget cuts and slow growth. Sweden’s economic expansion has exceeded the central bank’s forecasts, meaning it may raise the benchmark rate to 1.25 percent by the end of the year from 0.5 percent, Nordea’s Isaksson said.

The OMX Stockholm 30 Index has gained 13 percent this year, beaten only by Nordic neighbors Denmark, Finland and Iceland, compared with a peer group of 24 developed country stock markets, Bloomberg data show. The index today touched its highest level since December 2007 at 1,077.78.

“Many foreigners like Sweden because of its cyclical exposure, but also because the krona is expected to get even stronger as the Riksbank so clearly has shown it will continue to raise the key rate, which is not the case in Euroland or the U.S.,” said Martin Guri, an equity strategist at Nordea in Stockholm. “If you as a foreigner buy Swedish shares, a good relative performance could come both from the stock index and the currency.”

By Niklas Magnusson and Adam Ewing

To contact the reporters on this story: Niklas Magnusson in Stockholm at nmagnusson1@bloomberg.net Adam Ewing in Stockholm at aewing5@bloomberg.net.


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