Svein Aage Aanes, head of Fixed Income at DNB, told the recent Nordic Investment Managers Forum in Luxembourg that there are particular opportunities in high yield from the Nordic region.
What makes the Nordic High Yield Market so special?
The Nordic region as a whole has about 27 million inhabitants and represents a total economy with a diversified business sector. The countries comprising the Nordic region have low public debt levels, high per capita growth rates and among the most equal income distributions in the industrialised world. The Nordic region is also among the areas in the industrialised world where growth rates have been highest since the financial crisis. Historically, Norway has represented the largest part of the Nordic high yield market and for this reason the energy sector has a much larger share of the overall market size than most other high yield markets. Over the past few years we have seen increased issuance from particularly Sweden, but also Denmark and Finland creating a much more diversified market place.
Why is the market growing constantly?
The market growth is related to the same developments that we see in other areas in Europe. The new regulatory framework makes it less profitable for banks to lend to corporate clients, pushing up margins and making funding through capital markets more attractive. We believe this is a trend that will continue in the years ahead.
Yields are high, is the risk rewarded?
We believe so. Clearly, the high yield levels are partly a consequence of the sector composition of the Nordic high yield market, with the energy sector still representing a sizable share of the market. But in our view yields have also been pushed up for other sectors though outflow of funds over the past two years. There is no doubt that the Nordic high yield market has been through a difficult period since the drop in the oil price. Our view is that the worst is behind us and that yields in the market place are attractive.
How relevant is the oil price for this asset class?
The importance of the oil price has come down for Nordic high yield. Massive cost cuts by oil producers makes it possible for them to generate positive cashflow at much lower oil prices than two years ago. The cost cuts have hit the oil service sector and led to a wave of defaults and restructurings. There is still overcapacity in the oil service sector and it will take several years to phase out this overcapacity. That being said, the oil price is still important in the sense that it will influence the level of investment in the sector and thereby the length of the cycle. We expect that the oil price will increase somewhat from present levels in the years ahead, slowly leading to higher capacity utilisation in the oil service sector.
Svein Aage Aanes was speaking at the recent Nordic Investment Managers Forum, which took place in Luxembourg on 6 October. For further information click here: www.nimf.lu