Swedish Equities: Capturing the Recovery in Domestic Demand – A Catalyst-Driven Opportunity

The Swedish economy stands at a pivotal juncture, with a confluence of monetary easing, fiscal stimulus, and improving household finances poised to ignite a consumption-led recovery. For investors, this presents a compelling opportunity to capitalize on sectors directly tied to domestic demand. Yet, the path forward is not without risks, particularly as global trade tensions and currency fluctuations loom large. Let’s dissect the catalysts, opportunities, and pitfalls in detail.

The Monetary Policy Catalyst: Riksbank’s Rate Cuts Fueling Borrowing Power

The Riksbank has been aggressive in easing monetary policy since 2024, cutting its policy rate by 175 basis points to 2.25% as of March 2025. While the central bank paused further cuts in May, signaling caution amid global uncertainty, the cumulative impact of lower rates is already tangible. For households, this translates to reduced mortgage costs: variable-rate mortgages, held by two-thirds of borrowers, now offer significant relief. The average 10-year mortgage rate has dropped to 3.1%, easing debt servicing burdens and freeing up disposable income for consumption.

The Riksbank’s forward guidance also hints at potential further easing. Analysts at Capital Economics anticipate a 25-basis-point cut to 2.0% by August, with the central bank’s “wait-and-see” approach remaining open to adjustments if inflation undershoots projections. This supportive stance creates a tailwind for sectors like retail and housing, where lower borrowing costs directly boost demand.

Fiscal Stimulus: A Tailwind for Household Spending

The Swedish government’s 2025 fiscal package, totaling SEK 11.5 billion, is designed to amplify domestic demand. Key measures include:- Tax reductions for low- and middle-income earners, boosting disposable income.- Lower fuel taxes, reducing household energy costs.- Labor market reforms aimed at reducing unemployment, which is projected to dip to 7.6% by 2028 from 8.6% in 2025.

These policies are already bearing fruit. Real wages, stagnant for years, are rising as inflation eases, with average real income growth hitting 1.5% in early 2025. The IMF forecasts private consumption to grow by 2.0% in 2025, driven by this fiscal boost.

Household Resilience: A Foundation for Recovery

Swedish households are emerging from years of deleveraging with newfound resilience. Key trends include:- Housing market rebound: After years of declines, home prices are projected to rise 3–4% in 2025–2026, supported by lower mortgage rates and pent-up demand.- Debt-to-income ratios: While still elevated at 185%, the trend is stabilizing, with households prioritizing savings over debt accumulation.- Savings rate: At 7.5%, it remains robust, providing a buffer for increased spending.

This resilience is critical for sectors like retail (e.g., IKEA, which has seen a rebound in domestic sales) and consumer services (e.g., telecom giants Telia and fintech Klarna), where discretionary spending is on the rise.

Sectors to Watch: Retail, Housing, and Services Lead the Charge

1. Retail & Consumer Discretionary: Companies like ICA Group (grocery retail) and Nordstrom Sweden (apparel) benefit from higher disposable incomes and tax cuts. The OMX Stockholm Consumer Goods Index has outperformed broader benchmarks YTD, rising 8% versus the OMX Stockholm 30’s 3% gain.
2. Housing & Construction: Lower mortgage rates are spurring demand for housing upgrades and new construction. Skanska, a major construction firm, has seen a surge in residential project inquiries.
3. Consumer Services: Firms like Telia (telecom) and Coop (retail) are capitalizing on increased service consumption, aided by government grants to regions and municipalities.

Risks: Export Headwinds and Currency Volatility

Despite the domestic optimism, two critical risks loom:- Export Sector Vulnerability: Sectors like automotive (Volvo, Scania) face a projected 10% drop in U.S. exports due to tariffs, diverting capital from domestic investment.- SEK Appreciation: A stronger Swedish krona against the euro could squeeze profit margins for exporters, while volatility tied to U.S. trade policies adds uncertainty.

Investment Strategy: Play the Domestic Recovery, Mind the Risks

Investors should focus on domestically oriented equities while hedging against external shocks:- Buy: Retail and housing stocks with low export exposure, such as ICA Group and Skanska.- Avoid: Heavy exporters like Volvo Cars until trade tensions ease.- Monitor: The Riksbank’s next rate decision (June 18) and fiscal stimulus updates.

Conclusion: A Cautionary Optimism

Swedish equities offer a compelling entry point for investors seeking growth in a post-pandemic world. The combination of monetary easing, fiscal stimulus, and household resilience is creating a virtuous cycle for domestic demand. Yet, the path is not without potholes: export sectors and currency fluctuations demand close scrutiny. For those willing to navigate these risks, Sweden’s recovery presents a unique opportunity to profit from a resilient consumer base and a central bank ready to act. The question is not whether to invest—but how to do so wisely.