Bullish news from the Swedish experience!

This article was published in the Financial Times. The message? Buy stocks aggressively!

View of the Day: Sweden offers solace
By Tim Bond

Published: October 9 2008 15:26 | Last updated: October 9 2008 15:26

Sweden’s experience during its early 1990s banking crisis has many parallels with current events and offers a “surprisingly upbeat” message for equity markets, says Tim Bond, head of global asset allocation at Barclays Capital.

Sweden was forced to rescue its banks in 1992 after a credit and real estate bubble in the late 1980s. The main intervention came in September 1992 when the government implemented a blanket guarantee for all bank liabilities (excluding shares) and promised capital injections for troubled banks. Mr Bond notes that at that point, Swedish GDP had been falling in year-on-year terms for seven quarters, and the contraction continued for a further three quarters.

Meanwhile, the Swedish stock market fell 45 per cent between July 1990 and October 1992, but hit a low just one month after the government’s intervention. Over the next 12 months, it rallied 43 per cent and then rose a further 20 per cent the year after that. Bank stocks fell 23 per cent in the month after the intervention, but then hit a low before rallying strongly.

Mr Bond says: “The financial system moves well ahead of the real economy. If the past is any guide, the next two or three quarters should see severe declines in GDP in many economies, followed by another three or four quarters of sub-par growth. However, the low for equity markets – if Sweden is any guide – should be within the next three to four weeks.”