INVESTMENT TRENDS: Pause for thought

The Nordic equity markets have had a good run, but the beginning of this year may not bode so well. Angèle Spiteri Paris analyses investor appetite

In the midst of a turbulent 2010 in Europe, the Nordic markets, Sweden in particular, offered investors relative calm. But the beginning of this year’s performance was not as auspicious, which leads to the inevitable question of whether these markets are headed for a fall.

Last year Sweden’s stock market was Europe’s best performing, rising by 27% over the twelve months. But at the beginning of 2011, it soured somewhat.

In a recent investment outlook for equities, One player, SEB, says that at the beginning of the year, Nordic stock market performance has generally been significantly weaker than elsewhere. “Sweden has one of the few stock markets in the entire world without rising share prices,” it said. “After very strong performance in December, the OMX Stockholm exchange lost more than 1% in January. Early February was also weak, and the exchange has now declined by 1.5% since January 1.”

One reason for the weak stock market performance in Sweden is the fourth quarter 2010 company reports, which have now begun to appear. SEB says that in a number of cases, they have not lived up to the
high expectations that arose after last year’s sharp price gains, especially among industrial companies.

“Before the report season, expectations were that companies would report a total sales increase for 2010 of 1.3% and a profit increase, excluding nonrecurring items, of 48%. Market observers also expected dividends totalling SEK146bn [€16.6bn], which are mainly disbursed in the spring,” the bank notes.

These figures are a clear sign that the spectacular past performance cannot last forever and the likelihood of a correction in Nordic markets, especially in Sweden, is now very real.

Hans Hedström, president at Carnegie Fonder, says: “Over the last couple of weeks the Swedish market performed quite badly compared with others. The outperformance of the market for the past two years has been so extreme that the question was howit could be maintained.”

And this maintenance seems to be slipping.

Tomas Scherp, country manager, CEO of the Swedish asset management company Alfred Berg, says: “Although we’re optimistic about the prospects for the Swedish equity markets, we will have a bit of a struggle towards the second half of the year. This is mostly because we’re less bullish on corporate development.”

So the Swedish market may no longer be the apple of domestic investors’ eyes.

Hedström says: “There is competition from the Finnish and German markets. I’m seeing a change in the trend where domestic investors could be looking for other opportunities.”

But regardless of recent short-term performance, the surge in these markets experienced last year cannot be denied.

Following the trouble in what has been dubbed “peripheral” Europe, investors homed in on the Nordic markets, which had shown robust performance.

During 2010 Sweden saw share prices rise by more than 20% due to strong economic growth.

Hedström says: “Since the recovery started two years ago, the Swedish stock exchange has been the best performing worldwide. Obviously investors have been looking for opportunities here.”

Gustaf Hagerud, head of asset mangement and deputy CEO at Swedish pension fund AP3, says: “We’re pleased to see the Swedish markets doing so well as it buoys our investment holdings.”

Weights and measures
In fact, AP3’s 2010 annual report, released in mid-February, shows that the fund’s equity portfolio benefited from the regional weights selected during the year and outperformed the market weighted MSCI All Countries World Index (MSCI), which gained 10.6% during the year.

“Overweights in Swedish and small cap equities helped the portfolio to outperform the index. Swedish equities accounted for just over 25% of exposure and yielded a return of 26% during the year. Swedish companies were helped by exposures to developing countries and by the relatively strong state of Sweden’s public finances. The overweight in small cap equities was due to a high proportion of private equity and a 1% holding of growth companies in the life sciences sector,” the report states.

The Swedish fund industry had the highest figure of assets ever recorded at the end of 2010, when total assets under management reached SEK 1,964bn at the end of the year.

“It’s not only domestic investors that have made money on the back of the gains in the Swedish market, foreign investors also profited,” says Hedström, who acknowledges, however, that local investors may have had more to gain. “The domestics may have benefited more because Swedish people have a lot of savings in Swedish equities and they’ve been winners in this regard. Over the last two years they’ve been more reluctant to go elsewhere.”

In addition to their fervent belief in domestic markets, Nordic investors have always been known to be enthusiastic investors in emerging markets and this had not been dampened, at least until earlier in the year.
A recent survey by Tell Media Group found that 56% of respondents plan to make new investments into long-only emerging market equities and 31% are planning 2011 allocations to emerging market fixed income.

But in light of the political strife in the Middle East, one could question whether the fire for these higher risk investments has been extinguished.

In AP3’s situation, this is definitely not the case, Hagerud says: “We’re not pulling back on investments in any particular region due to the unrest in North Africa. We had no exposure to that particular part of the world anyway. Whether the issues in those countries has a negative effect on the rest of emerging markets is a different issue. We have a view on it but are not making it public. Our policy is to only make comments regarding our market view in our annual and interim report.”

World events
But on the retail side, Carnegie’s Hedstrom says: “The appetite for emerging markets in the Nordics is very retail driven and therefore investors react quite strongly to world events. In light of what is happening in North Africa, we could very well see a pull-back on emerging markets.”

Scherp at Alfred Berg is less convinced about the negative outlook for emerging markets in the Nordics. “In the short-term the turbulence in North Africa may have an impact,” he says. “A long-term impact on investor sentiment is less likely although that largely depends on the outcome. However I still believe that emerging markets will form a large part of a Nordic investor’s portfolio. They know these markets very well.”

That may be so but some experts say that the civil unrest may highlight risks that had, maybe been taken somewhat for granted following years of relative calm in most of these countries.

Jan Erik Saugestad, CIO at Storebrand Investments, says: “It would surprise me if it [the trouble in Mena] doesn’t underscore the political risk of investing in these countries. So people will be more aware of those risks as a result.

“I don’t think it will derail people’s thinking – greed will overcome fear eventually. There will be bumps in the road and risk premiums will go up and down but it’s hard to say that the appetite for emerging markets is not a long-term trend.”

©2011 funds europe



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