Follow Nordic model to long term gains, urges Norway’s Delphi

Øyvind Fjell, Oslo-based manager of the Delphi Norden fund, outlines why he believes the region remains an oasis for long-term investors.

While the rest of the West seems to be starting to wander in the wilderness, the Nordic region’s high exposure to structural growth and extremely strong national finances make the region a positive exception.

The past few years’ developments in the financial market have shown us glimpses of the future. The high levels of private and public debt indicate that the global growth rate will be both lower and more volatile than before. At the same time, we can see several bright spots. The growth in emerging economies will make a positive contribution for several decades to come, and the consumer growth in this region may be one of the most exciting things to seek exposure to. If we are to take a very long-term view, there is reason to believe that a more fragmented world will also be reflected in greater differences between companies. We therefore have more faith in hunting with a rifle than with a shotgun. It is more than ever about choosing the right trends.

Relative choices

Equity investors face a number of choices, most of which are relative. At Delphi, we believe that the Nordic region will be a relative winner in the future. That does not mean the Nordic region has no drawbacks but we believe that, going forward, it will be a better place in which to be invested than many other regions. From a growth and risk perspective, the Nordic region is particularly positive.

The Nordic growth perspective

To put it briefly, growth can be divided into two parts: cyclical growth and structural growth. Cyclical growth fluctuates with the general economy. In the Nordic region, we have a great preponderance of companies that are cyclically exposed. To put it plainly, this means that when the global economy is doing well, the Nordic region does extra well – and vice versa. Structural growth, on the other hand, is less affected by the economic cycle. This comes from slower, more secular trends that, over time, provide a significant contribution. A good example of structural growth can be seen in emerging economies, where the ongoing urbanisation is expected to continue during the next few decades. In a situation where there is greater uncertainty linked to the cyclical growth, exposure to structural growth will lead to both less volatility and greater predictability. These are key words for a good, long-term return.

Since the stock market in most cases prices in all the known information quickly, it can be asked whether the stock market cannot manage to price growth correctly? In such case, strong structural growth should be priced more highly than cyclical growth. In our experience, this is true to a certain extent but the stock market’s inherent short-term view tends instead to overvalue the importance of the latest quarterly report.

The Nordic region will continue to benefit greatly from the dominant structural trends in the global economy – especially in the manufacturing, raw materials, oil and gas sectors. As a result, the growth of the Nordic listed companies is expected to be relatively strong. If we look at the distribution of sectors in the Nordic area, the manufacturing, raw materials and energy sectors currently make up around half of the Nordic index. With around 40 per cent of their demand coming directly from emerging economies, these sectors are in a very favourable position. Since the growth in emerging economies is strong, this percentage will probably increase. At the same time, the actual exposure is even greater, since the Nordic region also exports to countries which themselves export to emerging economies – a good example of which is Germany. The Nordic region’s relatively favourable position is also underlined by its limited exposure to Southern and Central Europe.

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