Think of countries such as Sweden, Denmark or Norway and generally the associations are quickly clear: pristine nature, elk, welfare state, Vikings and possibly also a well-know furniture store and its meatballs. We do not tend to associate these countries with terms such as growth, good returns, dynamism and investments. A big mistake.
“Although Scandinavia is small in comparison with Europe as a whole, investors will find a diverse range of extremely well-managed companies,” says Hagen-Holger Apel, economist and portfolio manager at DNB Asset Management.
Contrary to common opinion, which still likes to place countries such as Sweden or Denmark in the slightly sleepy “welfare state area”, these days it is fairly easy to establish a company in the Nordics.
A World Bank Index that tracks how quickly a business person can get a power supply, how complicated planning applications are, etc. sees Denmark in third place, Norway in sixth and Sweden is also under the top ten of the 190 countries in the listing overall. Incidentally, Germany ranks 17th only here.
No wonder that investments are worthwhile (once more). Looking at the past five years, since the end of 2016 German shares, excluding dividends, have risen around 60%.
However, the VINX Index, containing the 100 biggest companies in Norway, Sweden, Finland and Denmark, has seen shares rise, excluding dividends, around 120% in the same period, in other words twice as much. The broader-based VINX Benchmark Capital Price Index also performed favourably.
“If one looks at the situation for the past eight years, from 2016 the VINX generated an additional annual return for investors of 5.2% compared with the Eurostoxx 50,” says Apel.
The VINX benchmark is composed of the biggest and most traded equities on local exchanges, of which Swedish equities are most strongly represented within this index with a share of 46%, while 24% of the equities are listed in Denmark, 16% in Finland and 9% in Norway. As much as 75% of the index is quoted in Scandinavian currencies.
“Anyone investing in the region 0ver this period who was prepared to accept currency risks was rewarded with additional returns,” explains Apel. A total of 149 companies are listed on the VINX Index.
Scandinavia benefits overall from stable political and economic conditions, a high level of education and access to new technologies.
This means that the Nordics hold their own when it comes to bonds, and not just in the stock market. Here, the currencies offer additional return opportunities.
Admittedly, in the past few weeks the euro has appreciated substantially relative to the dollar but the Danish krone, for example, is even stronger. Danish monetary authorities keep the krone within a certain margin in order to deter speculators, prompting the recent increase in the currency against the euro. Therefore, Danish bonds have yielded currency gains. The Norwegian krone was also at its highest level in two years against the euro in September 2017.
“This development is mainly due to the fact that the Norwegian economy recently grew more strongly than expected and the krone is still undervalued against the euro,” Apel says.
The Swedish currency has also risen in value recently. And the Norwegian sovereign wealth fund continues its record-breaking run and just passed the magic figure of $1trn AUM on account of a high return of 6.5 % in the first six months of 2017. With this sum the federal government in Germany could repay two thirds of its entire debts totalling €1.3trn (equal to $1.5trn).
The Norwegian national wealth is mind-boggling too when worked out on a per-capita basis. Each of the close on 5.3 million inhabitants is allotted around $192,700, or €164,000. The purpose of the fund is to provide for a rainy day and to secure Norway’s pensions.
A secret of the success is certainly also the high quality of life in the Nordics. In the corresponding rankings they occupy top spots again and again. The picture is similar for sustainability.
ESG (Environment, Social, Governance) or sustainable investment is at hot topic.
However, this is also a trendy term – many sell old wine in new wineskins. Also because there are still too few uniform standards and too often it only concerns non-qualifying criteria and “red lists”.
Nordic countries such as Sweden, Norway, Finland or Denmark have been active in this domain for a long time already and are first movers. This applies also in particular to banks such as Sparinvest from Denmark or DNB from Norway. In many sustainability rankings of the UN for example the Nordics often occupy leading positions.
“Here, it is not about exhibiting some starry-eyed idealism; instead, it is about managing, rationally and credibly, the investment process with clear ESG guidelines in order to minimise risks and to increase yields,” says Mikkel Strørup, regional director with Sparinvest partly responsible for international fund sales, principally for the institutional customers in Luxembourg, Switzerland, UK and Asia.
Another benefit: The Nordic states have withstood the financial crisis very well
This is largely thanks to earlier reforms. Therefore, it is no coincidence that quite a few experts see the Nordics on the ranking lists for competitiveness and low levels of debt right at the top. The comprehensive welfare state which now also features market elements more strongly has become more efficient. Unbending ideologies have yielded in part to pragmatism even if the public-sector shares in Denmark, Finland and Sweden are still very high at more than 50%. At over 40%, taxes are still very lavish compared with other EU countries.
Even before the end of the last millennium it was apparent that the all-encompassing welfare state “Made in Scandinavia” had reached its limits. High taxes curbed enthusiasm, the state was living beyond its means, and the investment climate was anything other than favourable.
As a result, Sweden and Finland, for example, resolutely implemented privatisations in telecommunications and the energy market, similar to what happened in Germany.
“Denmark relaxed its stringent labour laws by linking a comparatively lower degree of protection against dismissal with large-scale welfare safeguards. With an active labour market policy record levels of unemployment could thus be reduced. There was greater fiscal discipline too. This all paid off because in the financial market crisis there was then scope to take countermeasures and provide investment incentives,” explains Strørup.
“This has made the Nordics more resistant to crises than other countries.”
Plus, for example the economic structure in Denmark is characterised by a high number of small or medium-sized industrial companies and service providers, who are often highly specialised and rank amongst the best technologically. This makes them less vulnerable than being dependent on a large player, as the example of Nokia has shown for Finland.
Despite progress, the Nordics still have some work to do. The high public-sector share and tax burden have already been addressed. Much also needs to be done to integrate the many refugees into the labour market. In terms of population size, Sweden for example in the EU has one of the highest reception levels of refugees.
The system is not very efficient. The recording and treatment of asylum applications is an unusually lengthy process and the recognition of foreign education is often unworkable.
Norway remains greatly dependent on the oil price and at the same time there is the risk that the oil revenues and the brilliantly performing sovereign wealth fund will make the country sluggish and unimaginative.
Denmark recently showed a few weaknesses in the field of exports to Germany for example because the boom for wind turbines was declining.
Nevertheless, the Nordics provide good investment opportunities as described.
This is part 1 of a series on the Nordic markets
DNB Asset Management and Sparinvest feature at the Nordic Investment Managers Forum in Luxembourg on 26 October. For further information visit www.nimf.lu
