Expectations remain positive for local equity in Sweden
Sweden is an export country, and this is something that needs to be considered in context of equity investments, according to Albert Hæggström, head of Swedish equity, and Johan Ågren, portfolio manager at Alfred Berg, the Nordic investment specialist that is part of BNP Investment Partners.
The macro issue is trying to judge just how strong global growth is and what this might mean ultimately in terms of enterprise value, Hæggström (pictured) says. “We are fairly cautious in terms of the global economy. We believe the incredibly large debt mountain that’s out there is a big drag. We are definitely in the camp of ‘new normal’ and slow growth,” he says.
“If you look globally, people say equities have not risen over 10 years. But if you look at debt, it has increased. And this has pushed up the enterprise value [market value plus net debt] of the global economy.”
From a Swedish perspective, the mantra today is to buy equities, because relative to other assets, it is possible to get a decent return. If, as an investor, one believes in slow growth, even 2% globally, with inflation at 2% to 3%, it is still possible to get a 5% nominal return including the dividend. That is a lot better than other assets, Hæggström says.
Then there are other risks, but here too, local equities do well: “The political risk to Swedish companies from the Swedish government, and state of society, is lower than in many other places. In a global perspective, this gives Swedish companies an advantage.”
Stability, well-run companies, good corporate governance are factors in Sweden’s favour. There are other issues. For example, if central banks are buying, it is worth considering buying similar assets.
Hæggström says: “Currency reserves were used at the end of 2012 to buy Norway, Finland and Sweden.”
There is a lot of money floating around the global financial system because of monetary policy being pursued by central banks. And it is important to recognise that the amount of money in stock markets is still relatively small compared with the amount of money in global fixed income markets. This means if a small amount of the fixed income money is cycled into the equity market, it could have significant implications.
Currency is another factor influencing European investors, given the relative strength of Nordic ones versus the euro.
Alfred Berg’s overall view is to remain somewhat cautious.“But there are many Nordic companies that are cheap, in mind of their dividend yields and sustainable dividends,” Hæggström says.
Ågren, who is focused on the area of small caps, takes a slightly more positive view. He says in the past year bigger companies did better than smaller companies, which he terms ‘frustrating’, especially because of the way this was driven by liquidity.“There was an unusually high discount on smaller companies compared to bigger ones,” Ågren (pictured below) says. Subsequently, from the start of 2013, smaller companies have performed better. Partly, this is because the market adjusted to reflect what he believes was an excessive discount, but also because of improvements in liquidity in the small-cap space.
Then there has been a certain level of M&A activity since the start of the year. Ågren says one of the interesting issues around this development is the extent to which owners have been rejecting initial bids. He says this may be evidence they believe they can get a better price.
Some majority owners are putting bids on their own companies, further suggesting a positive outlook for the future. The downside of M&A is that it reduces the number of companies that are listed. This makes it important that any new listings of small cap companies deliver quality as well as quantity to the market.
“It is important that these new companies are good quality companies,” Ågren says. The quantity of new listings is likely to hold up, he adds, especially considering how private equity investors have run over time in terms of holdings that they would normally be seeking to exit.