Why Scandinavia is a Christmas cracker

By Euan Stuart Dec 21, 2005

For most people at Christmas time, Scandinavia means snow, fir trees and a bearded gentleman with a large sack of toys.

For investors in the region, however, there’s another good reason to celebrate. The markets in Norway and Denmark are up more than 30% this year, with Finland and Sweden not far behind. Why has the region been such a cracker? According to Andrew Lynch, European fund manager at Schroder Investment Management, low interest rates and strong economic growth across the region have been important factors – plus the fact that it’s home to many “high-quality companies”, particularly in the financial sector.

As a result, foreign predators are queueing up to buy Scandinavian firms. One of the most high profile of the current round of deals is the battle for Swedish insurer Skandia, currently being courted by South African rival Old Mutual, eager to turn itself into Europe’s eighth-largest insurance firm. In Denmark, too, a mixture of low interest rates and attractive valuations have led to an “unprecedented spate” of private-equity deals, says Clare MacCarthy in the FT. This has already “transformed” the Danish stockmarket, with buy-outs so far announced taking $15bn (£8.5bn, 10% of the total) in market capitalisation off the Copenhagen exchange this year (assuming the DKr74.5bn, or £6.8bn, acquisition of TDC, the national telecoms incumbent, goes ahead). All this private-equity activity in effect shrinks the supply of equity investment opportunities, and so helps push share prices higher. The TDC announcement followed news of the private-equity buyout of ISS, the world’s largest cleaning services company, and a bid to buy into, and delist, Copenhagen Airports. 

With its long North Sea coastline, Norway has the additional benefit of a thriving oil industry. It is the third largest oil-producing economy in the world. High oil prices have been a boon to many of Norway’s listed companies, helping to push its stockmarket up 35% this year and making it the best performer in the region. And it looks as though the good news isn’t over yet, with the Norwegian economy firing “on all cylinders”, according to Lorenzo Codogno, European economist at the Bank of America. GDP is speeding along at close to a 3.5% annualised rate in the third quarter and the outlook “remains positive”, with energy-related spending expected to pick up sharply and consumer spending likely to remain buoyant during 2006.

Mention the Finnish stockmarket and most people will be able to name only one company – Nokia. The fortunes of the two are indeed intimately linked, with the latter’s good performance recently helping the Helsinki market record a near 30% increase this year. But Finland is not just about telephones. Other companies worth investigating include blue-chip banking group Nordea (NOE, 580p), which has the largest customer-base of any financial services group in the Nordic region, according to the European Banker, giving it heavy exposure to growth in the region – or the diverse metals group Outokumpu (OUTA, $11.99, listed in Berlin), which is doing well out of soaring metals prices globally. So if you have bought into Finland this year, you’ll be well aware this Christmas that there’s a great deal more to it than Lapland and its well-known inhabitants.

Two tasty Swedes

Nokia is the best known firm in Scandinavia, but it probably isn’t the best buy. In its recent results presentation, it did enough to “shrug off “ short-term concerns, says JP Morgan telecoms analyst Mark Davies-Jones, but not enough to make the shares an outright buy. There may be an “upside case”, but this depends on the 3G take up and handset prices stabilising.
 
A better current prospect could be Sweden’s Autoliv (ALV, $44.95), the world’s leading manufacturer of air bags, seat belt assemblies and other automotive safety equipment. It’s selling at a “remarkably attractive” 13 times trailing earnings, says Lisa Hess in Forbes. Autoliv manufactures in 30 countries – many, like Turkey and Romania, with low labour costs – and sells to the large automakers. Even though this is a difficult industry, with pressure on supplier margins, it has doubled earnings and tripled cash flow from operations over the past five years. In addition, it has bought back 18% of its shares since 2000.

Fund manager Andrew Lynch, of Schroder Investment Management, says his banking industry favourite is Sweden’s Skandinaviska Enskilda Banken (SDI, 1,140p). Having grown through acquisition over the past decade, it has a “significant international business” with more than 50% of profits now coming from outside Sweden. SEB’s small size and ability to sustain margins, the undervaluation of its life business and its focus on fast-growing eastern Europe all make it a “very attractive” stock to own.

Published in Stock markets | More articles by Euan Stuart

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