* Swedish economy set to outperform rivals
* Stocks, currency cheap but global economy to set tone
* Crown seen at around 9 to euro at end-2011
By Simon Johnson and Naomi Tajitsu
STOCKHOLM/LONDON, Sept 10 (Reuters) - A sharp upward revision to Swedish second quarter growth figures suggests its economy will outpace most rivals over the next couple of years, adding to the allure of domestic shares and the crown.
But the ride could be bumpy if broader risk aversion around the world weighs on assets not usually seen as a safe haven.
Sept. 19 elections may also prompt limited short-term volatility if the governing centre-right party loses its parliamentary majority. Some opinion polls show an anti-immigration party could hold the balance of power but minority governments are not rare in Sweden.
"We could see some volatility up to the election, but once that is over, the market will likely position for a stronger crown," said John Hydeskov, senior currency strategist at Danske in Copenhagen.
The euro is down 9.2 percent against the crown this year, while the benchmark Swedish index is up 11.3 percent. The FTSE index of European shares is up 2.7 percent.
This outperformance has come as the Nordic country bounced back rapidly from its worst output drop since World War Two.
The statistics office revised second quarter growth to 4.6 percent year-on-year in the second quarter after an earlier estimate of 3.7 percent, with quarterly growth of 1.9 percent, not far short of Germany's stellar performance.
"We are a bit concerned about the international situation, because if there is a new recession, then Swedish assets will get hit," said Olle Holmgren, economist at SEB.
"But if we can avoid going into a new recession globally, there are good reasons for Sweden to grow above its trend."
With interest rates seen rising above 2 percent in one year's time, against flat rates of 1.0 percent in the euro zone, the crown has further to go. The Riksbank hiked rates by 25 basis points to 0.75 percent last week.
The currency has already enjoyed a purple patch, strengthening to around 9.24 to the euro -- its firmest level since autumn 2007 -- against 11.8 in March last year.
"I think that the crown's real value against the euro is under 9 crowns," said Anders Soderberg, currency analyst at Swedbank. "In the environment we see now, there is room for the crown to continue to strengthen."
Banking group Nordea sees the crown at around 9.10 to the euro at the end of 2011 while rival SEB sees it at around 8.75.
While the crown is perceived to be higher-risk given its relatively lower liquidity, some fund managers say valuations remain attractive given it has only recently fully recovered from a dramatic sell-off sparked by the Lehman collapse in 2008.
"It makes sense to hold the crown from the standpoint of valuation and the country's fiscal prudence," said Thanos Papasavvas, head of FX management at Investec, adding that he has been overweight the currency in the past few months.
Although no official data exists to monitor crown positioning, SEB says its proxy data shows investors' long positioning is nowhere near the 2010 highs seen through March, which coincided with the euro's 5 percent tumble in February, its biggest monthly loss this year.
In fact, the data suggests investors have been largely neutral on the crown for much of the past month, and are just starting to increase long positions, with many perhaps first awaiting the election outcome.
BUMPY RIDE
Sweden's recovery has been helped by rapid corporate restructuring, high levels of domestic savings and robust public finances due to a relatively conservative fiscal policy.
Unemployment is falling, consumer sentiment is at a 10-year high, and corporate profits are set to reach record levels this year, mainly due to cost cutting but sales are also picking up.
The government estimates growth of 4.5 percent this year and 4.0 percent in 2011 -- outshining expectations of roughly 2.5 percent and 2 percent respectively for the United States and 1.6 percent and 1.4 percent for the euro zone.
Analysts say all this means Swedish assets are still good value despite gains over the last 18 months.
Magnus Axen, equity analyst at Evli Bank, said stock prices were discounting any sales or profit growth at all next year for Swedish firms.
But for 2011, 85 percent of Swedish firms expect better turnover than in 2010 according to a PMP marketing firm survey.
Axen said Stockholm's index could rise 20-30 percent over the whole of 2010 should economic worries ease.
"Over one to two years, with a more normal situation, maybe it could be 30-40 percent (above) where we are today," he said.
Should Europe and the United States slump, however, domestic strength will not be enough to hold up asset prices.
For a company like clothing giant H&M, Sweden makes up less than 10 percent of sales. Exports make up around 50 percent of the Nordic country's gross domestic product.
Europe and the United States are the key worry for exports. But a strengthening crown could also hurt sales abroad.
Bond yields, currently at record lows, should be hurt if Swedish interest rates rise faster than others although shorter-dated paper could hold up if the economic outlook sours.
Strong public finances will continue to attract bond investors and if worries about the international economy increase, the Riksbank might raise rates at a slower pace. In that case, yields at the short end of the curve could fall further, analysts say.
Nordea sees yields on 10-year Swedish debt at 3.35 percent in 12 months from around 2.48 percent currently with the spread over euro zone debt at around today's levels. (Additional reporting by Sandra Jansson; editing by Stephen Nisbet)