The peculiar nature of the Swedish stock market

I prefer to focus on the Swedish and Nordic stock markets and therefore pay relatively little attention to American, British or other English-speaking blogs. Attentive readers may however have noticed that I follow one English speaking blog named Expecting Value. This blog post is partially a follow up on a comment I made on his blog (link) so unlike my normal writings this post will be written in English.

As an investor I try to focus on companies with an attractive combination of growth and dividends (explained here). Finding companies that are cheap enough (ie, providing a high yield) while still displaying attractive growth characteristics have however become increasingly hard on the Swedish stock market which have encouraged me to look at alternative markets for some of my investments. In one case this have led to the purchase of a UK-based company (Judges Scientific) and I am currently going through some exceptionally cheap Norwegian companies together with fellow blogger and Atea enthusiast Långsiktig Investering.

During this process I have come to realize that just like on many other topics Sweden is a rather extreme country regardless of if we compare ourselves to our Nordic neighbours or the rest of Europe. Swedes invest roughly 20 % more money in the stock market per capita than culturally similar countries and more than twice as much per capita than people in the major European economies.

The proportion of equity held by individual shareholders is however rather similar in Sweden and the UK due to the Swedish stock market pulling well above its weight when adjusting the total market cap for population size. Below is a table showing the total market cap of the London Stock Exchange and the major Nordic stock exchanges as well as the market cap per capita (sources: UK, NASDAQ Nordic and Norway).

	UK	Sweden	Denmark	Finland	Norway
Market cap (B£)	2313	526	286	161	172
Mkt cap/capita (£)	35524	54803	50926	29561	33846

This mean that Swedes invest roughly twice as much per person compared to UK citizens but have access to a domestic stock market that is only 50 % bigger per capita. For large companies the influence of this high level of competition between individual investors is insignificant as large institutional investors travel the earth and invest where valuations are deemed attractive. But for microcap stocks I am starting to suspect that there is a significant difference between Sweden, the UK and perhaps more significantly Norway which have an extremely low level of activity from individual investors.

In Sweden the enthusiasm for the stock market among small investors now mean that even small IT-consultancy firms routinely trade at valuations above P/E 10 or even 15 (Provide IT with 13 employees currently trade at P/E 15.5). Many of these companies seem fairly healthy in the current economic climate, but the miniscule size of these companies mean that they are impossible to invest in for traditional fund managers who routinely seek an ownership of less than 10 % in passive investments.

I am not sure on how to handle this situation as I can see some benefit in the higher liquidity provided by small individual investors selling and buying shares in Swedish microcaps. Furthermore it is very hard as an individual investor to conduct proper due diligence of foreign companies. As an investor focused on a rather focused portfolio (10-15 companies) this mean that I am reluctant to travel abroad without very strong incentives. But with a diversified portfolio of high yielding microcap stock with good growth characteristics may be an attractive alternative rather than accepting the currently low yields in Sweden.

A small example regarding liquidity

When I published my analysis of Data Response ASA (link) the daily turnover of the stock went from 25 000 NOK to  630 000 NOK where the largest net purchaser of the stock was Avanza Bank (a niche bank with a high proportion of all small stock investors). As a result the total valuation of Data Response was increased by 15 MNOK which mean that the stock immediately became 2.5 % more expensive.

For me as as a tiny investor this low liquidity is not much of a problem as the size of each company in my portfolio is far lower. But for a fund manager it would be impossible to build a sizeable position over the stock market as the stock price most likely would increase far beyond the margin of safety if someone tried to buy shares for 100 MNOK.