The Election Survival Guide for Swedish Stocks

(Bloomberg) -- While the Swedish stock market is filled with big multinationals that are little affected by domestic politics, the election at the end of week isn’t without risks for investors.

Exhibit one is the volatile Swedish currency, which has sunk to a nine-year low in the run up to the Sept. 9 vote where the nationalist Sweden Democrats could emerge as the second- biggest party. The former communist Left Party is also poised to gain seats. Both are for leaving the European Union.

To lure back voters, the Social Democrat-led ruling bloc has promised increased spending on welfare and tax increases, which the business community says will be bad for Sweden Inc. These include tax hikes on banks and capital as well as a continued push to limit profits for companies that use public funds to run hospitals, nursing homes and schools. The Social Democrats have also proposed an extra week off for parents.

"The election is exciting,” said Mattias Eriksson, portfolio manager at Coeli Asset Management. “I don’t expect any bigger drama on the stock market generally speaking, but the results will be interesting for the welfare and education stocks."

Eriksson, who owns shares in Humana AB and Attendo AB, said a victory by the center-right opposition would put an end to pressure on those stocks after an ongoing debate over the past four years.

"An alliance bloc election victory would probably mean that we can leave the welfare profit cap talks behind us," Eriksson said. "However, I don’t think that a red-green victory would meaningfully affect the current debate. The risk of the red-green bloc pushing through any changes regarding the profit cap will still be very small after Sept. 9."

But the complicated nature of the post-election landscape is raising concerns at the Swedish Shareholders’ Association, an umbrella group for thousands of smaller investors. In particular the gains of the two fringe parties.

This “will complicate the possibility of forming a minority government that can get through its ideas in parliament," said Joacim Olsson, chief executive officer of the group.

Sweden’s benchmark OMX index is up almost 20 percent in the past four years of Social Democratic minority rule, beating the 4.9 percent gain in the Euro Stoxx 50. But the U.S. S&P 500 index has surged 46 percent over the same time.

VOICES, STOCKS

  • On Aug. 9, the chief executive officer of Ericsson AB, Borje Ekholm, commented on the upcoming election saying "it would be positive if we’d get an increased focus on business policies."
    • "Having a strong government is always good. That creates conditions for political stability, and undoubtedly we’d all benefit from that."
  • Thomas Berglund, CEO of Swedish health-care services firm Capio AB, said on an Aug. 21 call that the focus must shift from debating whether to cap profits in the private welfare sector, as proposed by the current government and its Left Party ally, "to debating how to give healthcare to everyone who needs it within a decent time."
    • Berglund said that there’s “at least a 60% majority in the parliament for not regulating or stopping any outsourcing of health care or other services in the public sector."
  • Erik Penser Bank AB said that this election is a unique event that will require unusual caution, and took precautions by selling off its small-cap stocks and avoiding the krona.
    • "Does the market have a reason to be worried and stressed ahead of this election?” asked Jonas Thulin, head of asset management at Erik Penser. “Our conclusion is that yes, it has."
  • The Confederation of Swedish Enterprise says Sweden "needs a business friendly government."
    • It wants to prioritize enhanced integration through work, stop any attempt to strain private companies in the welfare sector and ensure that there’s sufficient competence.
  • Citi analysts including Tiia Lehto said in a note that a center-right minority government would likely push for more market-friendly policies.
    • "Sweden Democrats’ call for a referendum on EU membership is a key risk. Although this is highly unlikely to happen, Sweden’s stance toward the EU could still become less cooperative."
  • Danske Bank analysts including Michael Bostrom expect "lots of hullabaloo and turmoil and that a minority government will be formed", either under the Social Democrats leadership, or "more likely in our view" the Moderates.
    • Said risk of failure and an extra election is probably bigger under a minority government led by Social Democrats, bringing more uncertainty and pressure on the krona.
  • Olsson, CEO of the shareholders’ group, said that the "inherent strength of the companies will be more important for investors than the political situation."
    • "There may also be a renewed discussion about private actors and profit interests in welfare companies etc. But I don’t see us having a situation where a majority of the parliament would severely worsen conditions for business in general or for the business exposed to the welfare sector."
  • Stocks to watch include Capio, Attendo, Humana, Ambea AB and Internationella Engelska Skolan i Sverige Holding II AB.
WHAT TO WATCH, RED-GREENS
  • The red-green bloc proposed profit caps in the private welfare sector, and while the proposal doesn’t have sufficient backing in parliament, a red-green election win could keep the topic on the table and create uncertainty for private welfare providers.
  • The Social Democrats proposed a new bank tax to fund welfare measures; the party has been forced to withdraw two earlier tax plans.
  • The Left Party has proposed capping how much the banks can earn on mortgages.
  • The Green Party has proposed raising the aviation tax further.
WHAT TO WATCH, THE ALLIANCE

  • The center-right Alliance is generally regarded as being more business friendly and wants to cut income taxes 
  • It opposes a cap on profits in the private welfare sector, is against any increase in the current aviation tax, and opposes a bank tax.
  • It also wants to introduce lower entry wages for young people and those with little education, which could lower costs for companies, especially SMEs.

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