Strength in Troubled Times: What Scandinavian Equity Markets Offer

by Christian Bayer, Euro on Sunday

Dhe northerners spread fear and terror on European coasts in the Middle Ages through conquests and raids. Less well known is the fact that Vikings also had a long mercantile tradition with a dense trading network selling amber, skins and weapons. Today, oil and gas, among other things, are more in demand than ever in Europe, and the Scandinavian countries are seen as a haven of stability, prosperity and community cohesion.

The Danish and Norwegian term ‘hygge’ means ‘snug’ or ‘snug’ and is much more than a cliché marketed by the tourism industry. In an international comparison, the countries are at the top when it comes to quality of life. For example, the British Legatum Institute publishes an annual global wealth ranking based on twelve criteria. In the current Legatum Prosperity Index from 2021, Denmark, Norway, Sweden and Finland occupy the leading places 1 to 4 out of a total of 167 countries. “All countries have high competitive strength based on a universal and good education system, excellent infrastructure, sound public finances and low levels of corruption,” says yvind Fjell, fund manager of DNB Nordic Equities.

The countries were also able to score points in the Corona crisis with their lead in digitization. “When I was working in Scandinavia at the end of the 1990s, a day’s home office was already common for many colleagues,” recalls Florian Romacker, who is responsible for the FRAM Capital Scandinavia fund. “Now when Scandinavian friends visit me in Germany, we’re programmed to feel sorry for the dead spots in our cell phone network.” The term “Fram” means “forward” in Norwegian – and was the name of the ship used by Norwegian explorer Roald Amundsen for his South Pole expedition.

The far north is poorly represented in common European blue-chip indices. A disadvantage for investors, because a look at the figures shows that the region has clearly outperformed. From the beginning of 1999 to the end of 2020, the MSCI Nordic Countries achieved a performance of 240 percent. The MSCI World achieved 168 percent in the period, the MSCI Europe reached 138 percent. The prospects that the outperformance will continue in the future are good. Investors can put a basket of Scandinavian shares with 85 large and mid caps from Sweden, Denmark, Finland and Norway in their portfolio using an ETF. The Amundi MSCI Nordic ETF offers a cheap option with an annual expense ratio of 0.25 percent. At 12.6 percent, Novo Nordisk is clearly the heaviest individual stock in the index. The Danish logistics company DSV (3.1 percent) and the Swedish Holding Investor (3.0 percent) follow at a clear distance. The energy group Equinor is represented with 2.4 percent.

Special Industries

For investors, the region offers investment opportunities that are otherwise scarce or not available at all in Europe. These include, for example, oil companies or salmon farms. A high level of competitiveness is characteristic of many Nordic companies. “A common finding is that the home markets for each individual country are relatively small, so typically Nordic companies have been forced to specialize and compete in the global economy. As such, the region has a high proportion of exporting industries,” characterizes the fund manager Fell the region. “Although each country has specific strengths and sectors, together they complement each other in a good way. For example, Sweden is very strong in industry, Denmark in healthcare, Norway in oil and Finland in mining and materials.”

DNB Nordic Equities invests in Nordic equities across all sectors, with a particular focus on green companies. Before making any investment, Fjell not only looks at the fundamentals, but also considers the momentum and prefers to invest in stocks that have outperformed in the past.

Scandinavian expert Florian Romacker has identified five attractive segments that are particularly well represented in the region. In his view, these include digital infrastructure, energy, sustainable packaging, health and technology. “With hydrogen and wind energy stocks, the region benefits greatly from the topic of sustainability, which also plays an important role in the fund,” says Romacker. “I like growth companies with an outstanding market position in a niche, such as the Hexagon Composites subsidiary Hexagon Purus, the world market leader for hydrogen containers. In contrast to Germany, many medium-sized companies that are strong in such niches go public in Scandinavia. ”

Romacker has also taken advantage of special situations at oil companies where the market has priced in a significantly lower oil price than the $100 to $120 currently being quoted. But the Norwegians too, the sheikhs of the far north so to speak, have recognized the signs of the times as far as the future viability of the fossil fuel business is concerned. For example, the Norwegian lriese Equinor participates in solar companies and wind energy projects.

Partial overheating

Growth stocks have recently overheated, even in the cool north. “From a valuation perspective, things have gotten out of hand recently, for example at Tomra, a vending machine manufacturer for the return of empties. At some point, the company was no longer reasonably calculable for me due to its very high valuation, and that’s why I reduced the weighting in the fund,” explains the FRAM portfolio manager Romacker. “Meanwhile, the value has come back a bit, and I’ve bought back some. Overall, valuations are currently playing a greater role than they did a few months ago.”

The portfolio was also adjusted at DNB Nordic Equities: “Some of the green companies in the portfolio had difficulties in the transition from growth to value,” reports. yvind Fjell. “Overall, we have moved from a clear overweight in particularly renewable energies such as rsted (offshore wind), Scatec (solar) and Vestas Wind to more cyclical exposures such as Lindab (ventilation), ABB (electrification) or Wartsila (marine engines). This was in the current environment helpful.”

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