Scandinavian share market with strong focus on cyclical industries
28 November 2013. An economic recovery is looming in Europe. The deferral of tapering by the US Federal Reserve plus an improving economy around the world are making investors hopeful of an end-of-year rally and a promising beginning of the year 2014. The Scandinavian countries can benefit from a global recovery in two respects: thanks to strong exports to emerging markets as well as a high share of cyclical companies, an above-average growth rate is anticipated.
Signs are growing that the world economy is picking up speed. The decision by the US Federal Reserve not to cut back on bond purchases for the time being, plus the positive economic data from China, make the scenario of a worldwide recovery increasingly likely. ‘The early signs are good that global economic growth will rise cautiously in the current quarter and the beginning of the New Year,’ Karl Høgtun, manager of the DNB Scandinavia fund, is convinced. ‘The basis for a continuation of the rise in the share markets is therefore in place, and the probability of an end-of-year rally has increased considerably.’ The recovery is confirmed by the latest purchase manager indexes in the euro zone. In October they were at 51.3 points (industry) and 50.9 points (services) and thus lie above the growth threshold.
Moderate valuation of European shares
An increasing interest in European shares has been noticeable in recent weeks, as illustrated by the flow of funds. Are companies succeeding in reversing the trend in earnings performance? That is how it currently looks. Cyclical industries thus have the best starting point – the long-favoured defensive shares are showing an impressive valuation in the meantime. The valuations of European shares are still moderate on the other hand: on average, the Euro Stoxx 50 is valued with a profit/earnings ratio of 13.6.
Which countries will benefit most from an upturn? The rising economic trend should not hide the fact that the fundamental problems in Europe – namely the debt crisis – are still awaiting a solution. This applies above all to the crisis-ridden south. Added to this is the fact that the valuations have become detached from the lows in the meanwhile and are no longer necessarily good value. Moreover, financials and utilities make up more than 50% of the indices in both Spain and Italy, while especially in Spain financials are repriced to the same level as Scandinavian banks. The high burden of debt remains a sword of Damocles and will put pressure on the development potential of the southern countries over the long term. This also applies to other European countries.
Fundamental strength in the north supports companies
It all looks very different in northern Europe. According to the latest IMF report, Norway, Sweden, Finland and Denmark form a largely integrated economic area, distinguished by a high level of competitiveness. They are seen with good reason as a gateway to the emerging markets. Like no other economy in the euro area, Scandinavia has a high proportion of export-oriented companies. In Norway, over 40% of income is generated in the emerging markets, with the tendency rising.
Due to the low level of debt, the Nordic countries will not be forced in future to make sensitive savings should their budgetary situation deteriorate. There is no fear of either tax increases or subsidy cuts, factors that can have a negative effect on consumer spending.
Higher volatility is compensated
Historically speaking, Scandinavian share markets feature a higher degree of volatility. Much of this can be explained by the technology bubble around the turn of the millennium, when Nokia and Ericsson dominated the share indexes. Further reasons could lie in the leaner investment universe and in the overweighting of the industrial sector.
The higher risk has nevertheless paid off for investors: in a long-term comparison, the Scandinavian share markets have continuously outperformed, both in the global context and compared to the rest of Europe. The figures speak for themselves – since 1975 the Nordic share markets have risen by 12.6% p.a. on average, whereas the MSCI World and Europe lag behind at 9.6% and 10.4% respectively.
Keep an eye on property prices
Hardly any other region is in a better position than Scandinavia. Accordingly, the risks for investors are comparatively low. Rising property prices and the increasing debt of private households should not be left out in the risk analysis, as these can indeed be seen as a potential danger for economic development, especially in Norway. However, stabilising tendencies are noticeable here, with Norwegian banks being more restrictive in granting credit and slowing down the household debt level. Property prices have also remained constant most recently.
Conclusion: the Nordic model looks impressive in recovery phases
‘Scandinavia will benefit from a recovery of the world economy in two respects. Cyclical sectors have a comparatively higher weighting in the index than in the rest of Europe. The export orientation and the focus on emerging markets give the companies’ profit growth additional impetus,’ says Karl Høgtun.
» Fact Sheet / Fund Page - DNB Scadinavia (LU0083425479)
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