Nordic equity markets have long kept pace with more popular global counterparts and there are persuasive arguments for why the Scandinavian story is more than a once-in-a-year gift.
As many eyes turn to focus on Santa’s winter wonderland home this December, it’s wise to reflect that Finland and its Nordic cousins have been gifting investors some joyous returns for decades.
The Nordics are a prime hunting ground. The region’s equity markets have certainly performed impressively over the long term. The Swedish stockmarket, for example, has delivered real annual returns of around 6 per cent going back to the early 1900s – just about in line with the S&P 500’s annual return of 6.4 per cent. More recent figures show that between 2000 to 2020, the MSCI Nordic Index gained 230 per cent, outpacing the MSCI World Index’s 152 per cent gain by some margin.
Punching above their weight
Despite the Nordic's combined population of just 27m being a fraction of the US population of 334m, Nordic companies punch well above their weight globally and continue to offer a compelling investment case – and there are four reasons why.
First, Nordic companies tend to take a very long-term view – and they often do it better than many because they have a network of family-holding companies. Look no further than Investor AB, founded by the Wallenberg family, which has stakes in several of the largest Swedish companies, such as Atlas Copco, the Swedish multinational.
Another is Industrivarden, heavily influenced by the Lundberg family, which has stakes in the likes of Volvo and Ericsson. These holding companies behave like owners; they manage optimally across a company’s lifecycle because they are looking after the interests of their family on a multi-generational basis.
This ‘family effect’ feeds into a second driver, of companies being more prepared to invest, particularly in the growth stage of a company’s lifecycle. This has allowed investment in innovation and R&D where 80 per cent of Nordic companies invest more than average and allowed them to embrace technology. This has helped give rise to companies such as Spotify, Klarna and Novo Nordisk, with its groundbreaking obesity drugs.
“Nordic companies tend to take a very long-term view – and they often do it better than many because they have a network of family-holding companies”
Third, as companies mature, they can still generate a huge amount of value by sustaining high returns on capital and growing steadily every year. One of the things that's really taken hold in the Nordics is the idea of decentralised management. So, often a company can get stale as it matures with a large bureaucratic top management team remote from the industry front line in a capital city somewhere. Nordic companies are strong believers in decentralised management; they try and push responsibility right down to the local level. In Atlas Copco, if you’re a manager in a local area, you will have responsibility for the entire P&L. This decentralisation motivates management and has been successful.
Finally, when companies move into the redeployment phase of their lifecycle, the optimal strategy is typically to maximise cash flow and maximise returns, and that can be done through consolidation of an industry. That certainly happens in Sweden, where you’ve ended up with four banks that dominate the market unlike in the US, which has several thousand. The Nordic banks return most of their profits generated to shareholders and as a result provide high single-digit and even double-digit dividend yields, as Svenska Handelsbanken did last year.
Russia on the doorstep
This is not to say that the Nordics are not a region without risk; with their most immediate current issue being their proximity to, and in Finland's case, a shared border with, Russia. Vladimir Putin's aggression caused both Sweden and Finland to seek and obtain the protection provided by Nato. That said, there are tentative signs that a resolution to the Ukrainian war is around the corner, which could ease tensions.
Additionally, the region does have exposure to the wider European industrial and macro economy, which is increasingly looking severely structurally challenged. In mitigation, as one might expect with such a small home market, Nordic companies operate globally and have been very successful in the Americas and Asia.
The Nordics aren’t necessarily the first port of call for many global investors – particularly given all the attention around the US – but for those with a more value-orientated approach, it is one region that should, perhaps, feature on investors’ wish lists this Christmas.
Michael Crawford, CIO and founder, Chawton Global Investors
