Mon, 21/01/2013 - 16:06
ING Investment Management (ING IM) says the Swedish government bond market is the safest bond market in the world and believes Sweden will keep its safe haven status for the foreseeable future.
ING IM has analysed data over the last 10 years, using its proprietary scoring matrix and, in all but one year, Sweden ranked first in the world when looking at sovereign credit risk factors such as solvency risk; external dependency; and environmental, social issues and governance in order to gauge both the ability but also the willingness to service debt.
Thede Ruest, fund manager, ING IM, says: “The top three spots have consistently been taken by the Nordics – Sweden, Denmark and Finland – making it the bond market’s credit safest region in the world in the last decade. Sweden’s debt-to-Gross domestic product (GDP) ratio stands below 40 per cent and is one of the lowest in the world. The country is amongst the few high-income countries that in its recent past have been able to generate government surpluses.
“Sweden’s external dependency is very low due to its large and sustained current account surpluses – most recently at around seven per cent of total GDP. Sweden, unlike members of the European Monetary Zone, has its own country specific policy framework (fiscal, monetary and macro prudential) and its ‘own’ currency – the Swedish Krona - that allows for substantial flexibility to control funding costs.”
The investment manager points out that unlike corporate issuers that are generally forced into defaults, a sovereign issuer can always avoid forced default given that they have influence over their funding costs provided they have their own currency.
Ruest says: “It is important to assess the willingness to service sovereign debt. We believe the best measure for this is to assess how flexible, transparent and consistent the government of a country handles challenges in the fields of the environment, its social fabric and the overall design of its institutional infrastructure.”
The investment manager does accept that, although Sweden is the safest government bond market in the world, it does not imply that the Swedish government bond market is entirely risk free. The main risk identified is high household leverage that poses a key risk to the financial sector, and ultimately to public finances. In an adverse scenario where house prices come under pressure, asset values decline and unemployment rises households could find themselves in a situation where it becomes difficult to service debt. Swedish gross household debt rose between 2000 and 2010 more than 40 per cent as a share of GDP to an estimated 140 per cent.
From a tactical perspective ING has tactically bought Swedish interest rate securities that profit from Riksbank rate cuts. Currently, the holdings are above historical average. On a small scale, ING IM has witnessed clients strategically shifting exposure away from perceived sovereign credit risks within the Eurozone towards the Swedish and other Scandinavian government bond markets.
When a client’s aim is to reduce sovereign default risk the Investment Manager actively advises Sweden as a component of a diversified portfolio which we term the “Safe Treasury Bucket”. The nations, in order of perceived safeness are; Sweden, Denmark, Finland, Germany, New Zealand, Australia, United Kingdom, Netherlands, Canada and Austria.
Ruest says: “From a tactical perspective we only look at the Swedish rates market as Finland, Denmark and Norway are not liquid enough to get meaningful active positioning. Of course, from a longer term strategic buy-and-hold perspective, as previously mentioned, those markets are very interesting.”
ING IM points out that the Riksbank has cut its main rate in December last year to 1.0 per cent as the executive board judged that the Swedish economy slowed more than previously anticipated. This slow down is mainly due to a weakening in European export demand. GDP is therefore expected to increase at a slower pace and unemployment to rise slightly more then was previously assumed. At the same time, inflationary pressures are expected to be lower.
Ruest says: “Recent Riksbank action and communication indicates that Ingves’ concerns over the sustainability of household debt levels have lately appeared to take the back seat, with the Governor labelling it a longer term issue and that slowing of credit growth has been reassuring. Nonetheless, the balancing act between perceived financial imbalances versus low domestic inflation and high unemployment is likely to continue. The most recent ECB meeting has however eased pressure on further rate cuts from the Riksbank.”
Sweden is to a large part dependent on external developments in particular within the Eurozone. ING IM believes economic growth in Europe to be stronger then market consensus and says the 10 year Swedish rate levels should moderately rise from current levels.
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