Another Kind Of Brexit Trade, 1,000 Miles From London

(Bloomberg Gadfly) -- Carnegie Investment Bank AB hates political uncertainty.

The Swedish money manager offloaded all its U.K. holdings in the weeks before Britons voted to leave the European Union, and is still steering clear of the country.

That caution is understandable, but looks overly conservative when you look at the jump British stocks enjoyed after the vote as the pound's fall gave a boost to companies that get much of their revenue overseas.

The good news is there's another market that shows many of those traits. It's called Sweden.

These charts show how the declines in the pound and the Swedish krona -- the worst and second-worst performers among G-10 currencies this year -- have boosted each country's benchmark stock index.

Worries about a hard Brexit have weighed on the pound, while the Riksbank's commitment to keep interest rates lower for longer have hit the krona. In both cases, though, the stock market sees reasons to celebrate.

It's a straightforward and similar bet in some ways. The FTSE 100 boasts many companies that generate most of their revenue abroad, from miners like Rio Tinto to technology specialist Smiths Group.

The OMX-30 does too, from retailer Hennes & Mauritz to industrial group Atlas Copco. A weaker currency won't be a panacea for all ills -- telecoms equipment maker Ericsson has problems that go deeper than the exchange rate -- but analysts reckon it will offer a tailwind to revenue.

Still, there's a message here about the very different kinds of uncertainty investors are willing to live with.

Carnegie clearly doesn't like the political unknown of a U.K. unpicking ties with its biggest trading partner. It's not alone: an August survey of 83 money managers ranked Brexit and a possible EU break-up as the biggest threat to investors' portfolios.

Yet Sweden has its own economic unknown in the shape of a negative interest rate policy that has stoked a housing bubble and squeezed savers. The Riksbank has said rates won't be raised until 2018 at the earliest. Bill Gross has warned that the pain of negative rates on banks, insurers and pension funds will lead to capital destruction.

Appropriately enough, Scandinavians look on the idea of Brexit with skepticism, while the U.K. has very vocal critics of negative rates. Bank of England Governor Mark Carney, for example, said countries with negative rates had "got this a bit wrong."

For now, the worst fears on either side have yet to materialize. The U.K. economy has held up and the pound's depreciation has helped exports. Sweden is growing at a healthy clip and its banks remain among the best-capitalized and most profitable in Europe; their concentrated market share gives them better control over pricing.

Sweden is probably the safer bet right now, according to BNP Paribas strategist Edmund Shing, who reckons the OMX will outperform the FTSE over the next six months thanks to a steadier earnings outlook and better prospects for economic growth. 

But the outlook for the Swedish currency is still muddy indeed thanks to the interest-rate outlook: the krona's volatility dwarves its G10 peers, including sterling.

If Brexit is creating some big long-term unknowns, it's fair to call Sweden a very close second.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story: Lionel Laurent in London at llaurent2@bloomberg.net.

To contact the editor responsible for this story: Edward Evans at eevans3@bloomberg.net.