If trade wars and the decline of the dollar against the euro hadn’t already spooked them enough this year, European investment committees might be forgiven for worrying about the sector concentration of their portfolios after the equity market rally since the spring. After all, a passive investor with 40% in a global equities index would have around 10% in tech and just shy of 8% of the total portfolio in the top five stocks – Nvidia, Microsoft, Apple, Amazon and Meta.
The portfolio risk implied by global equity market concentration is one key factor in any decision to diversify. The relative attractiveness of assets elsewhere is the other side of the equation. The EU’s Savings and Investment Union policies aim to channel long-term investment to where Europe needs it most: tech, defence and renewables. While the case for investment in the European renewables’ ecosystem is robust, policymakers can only look on with envy at America’s growth landscape, in which innovative companies come to market, attract risk capital and can scale up to become future champions.
Indeed, such are the attractions of the deep capital pools in the US that many European private companies choose to list there: a report by New Financial this year identifies 130 European firms that have opted for a US listing in the past decade. One of them is Klarna, the Swedish payments company that debuted on the NYSE this month.
Despite this, the Swedish market is well supported by local institutions, many of which have dedicated domestic or Nordic equity allocations run in-house, and there are high levels of long-term ownership by family-controlled entities. Household allocations to investment funds are close to the top of the EU league with 10% of household wealth allocated to funds and 7% directly to shares, according to the OECD in a report this year. Where public equity market listings have declined across the world, Sweden has seen a net positive trend in the past decade – even if it couldn’t keep Klarna. While the market’s capitalisation is modest internationally, the number of listed companies – at more than 950 at the end of 2024 – means Sweden has Europe’s second-highest tally of listed companies after the UK.
Good long-term policies have underpinned these developments – in pensions and tax-advantaged retail savings. While Sweden clearly has a model that others will want to emulate, such policies take effort to put in place, and the political heavy lifting involved in creating durable, long-term incentives for entrepreneurship and long-term savings culture can take years, if not decades, to take effect.
Should Europe follow Sweden’s example? Enrico Letta’s 2024 report for the EC on the incomplete European Single Market called for a ‘28th regime’ for start-ups, which would provide a supranational framework for companies to operate across EU member state borders. This is the kind of regulatory ‘win’ that could help smaller companies to scale up, but it should not be seen as a panacea. Chances of a lift-off in European IPOs in the short run remain slim and investment committees should ponder carefully how to pivot away from the long-term success of US growth equities.
Liam Kennedy, Editorial Director
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