In 2020, Nordic equity markets (Norway, Sweden, Finland, Denmark) put in a stronger performance than those elsewhere in Europe. The MSCI Nordic Countries Index rose by 15.85% in 2020 versus a 0.66% fall for the MSCI EMU Index, an outperformance of 16.5%. The story was similar for the small caps, with the MSCI Nordic Small up by 23.8%, an outperformance of 18.2% versus the MSCI EMU Small Cap index.
Currency effects contributed little to the relative gains. Instead, several fundamental factors drove performance:
- The Nordic countries were relatively unscathed by the COVID-19 pandemic. Norway, Denmark, and Finland each recorded low COVID-19 case numbers and while Sweden chose not to impose severe lockdown restrictions, it was no worse off than the major European countries.
- The Nordic states acted quickly to put support plans in place for businesses and reduce bankruptcy risk. Their crisis management entailed a smaller economic contraction than that observed elsewhere in Europe.
- The resilience of the Nordic economies enabled their domestic sectors (especially telecommunications and banks) to avoid the sharp stock market falls seen elsewhere in continental Europe.
- Some Nordic companies involved in energy transition and/or fighting climate change have seen their share prices appreciate considerably, especially since the election of US President Joe Biden.
Performance analysis
A comparison of the MSCI Nordic and MSCI EMU indices reveals clear outperformance in the following Nordic sectors (Bloomberg data):
- Industrials (+700 bps). Nordic industrials coped well with the COVID-19 crisis and were quick to benefit from the recovery. The sector was also driven by a spectacular rise of Vestas, a world leader in wind turbines (+115%) and by fine runs from logistics names, such as DSV and Maersk.
- Healthcare (+400 bps). The performance can be explained in part by the solidity of Novo-Nordisk, and the rise in Danish biotech Genmab’s valuation multiples also contributed.
- Financials (+400 bps). Performance can be attributed to the overall quality of the Nordic financial sector and the resilience of its domestic economies.
- Energy (+175 bps). The low presence of oil companies in the index proved favourable and the main positive factor was a very strong performance by Finland’s biodiesel production company, Neste.
The only sector to slightly underperform the MSCI EMU index was consumer goods. The explanation for this lies in the absence of Nordic stocks from the luxury goods segment, which in turn was driven by the Chinese recovery.
Much of the outperformance is linked to the quality of Nordic companies, particularly in industrials and financials. We therefore believe this progress will be sustainable. However, another factor driving the momentum has been what we believe to be an excessive increase in the valuation multiples for certain ‘growth’ and energy transition stocks, to which our portfolios currently have very little exposure.
Indeed, the various government support plans set up in developed countries along with the election of US President Joe Biden have led to significant flows into energy transition stocks, regardless of their valuation levels. As such, Orsted (offshore wind farms), Neste (biofuel), and Vestas (wind turbines) respectively rose 84%, 96% and 118% over 2020, driven purely by rising valuation multiples, yet over the same period their 2021 earnings forecasts were revised respectively by +1%, -15% and 0%. For some companies, we are doubtful as to whether their profitability can be sustained given that competition within the segment has been weak so far but should intensify in the years ahead.
2021 outlook
Fiscal and monetary support and the arrival of COVID-19 vaccines are significant factors that will boost Nordic corporate results going forward. In 2021, the MSCI Nordic Countries Index is expected to rise by 19.3% and the MSCI Nordic Small by 20.4% on average.
However, some factors, such as the policy support programmes, have already been taken into account by certain market segments. Similarly, investors have already partially integrated the scenario of the COVID-19 vaccine rollout across the developed countries, which could allow a gradual return to normal despite continued uncertainty over timelines.
The consequences of a return to normal will be trickier to predict than it may seem. Some behavioural changes could prove to be structural (business trips, remote working, video-conferencing and e-commerce, to name but a few). Meanwhile, some sectors, such as restaurants and catering, could be hit by lockdown-related destruction of production capacity. In addition, the temporary consumer spending shift towards durable goods at the expense of services and leisure may blur the understanding of certain trends.
As a result, stock selection will be key in the months ahead as forecasts start lining up against actual outcomes. We believe that Nordic stocks are well positioned to benefit from the economic recovery, and we see opportunities emerging both among cyclical and more defensive stocks.
To know more about Nordic equities at Lazard Frères Gestion : http://www.lazardfreresgestion.fr/EN/Actualite_95.html?idActu=301&
Source : Bloomberg
The opinion expressed above is dated 1st February 2021 and is liable to change.
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