Rothschild sees ups and downs of Scandinavian bonds, currencies

Rob Stewart, head of Fixed Income and Currencies at Rothschild Wealth Management, has provided a balance of upside and downside risks to owning Scandinavian bonds and currencies.

In a report co-authored with analyst Alexander Deane, Stewart said that the search for safehavens had pushed investors towards Sweden, Denmark and Norway – along with Switzerland, Canada and Australia – as places offering downside protection in light of ongoing cuts to credit ratings of sovereign debt.

These countries’ relatively benign macoreconomic positions and credit strength mean their bonds and currencies are likely to remain strong, Stewart said. However, he added that these are countries heavily dependent on trade links, both with each other and other European markets. Germany makes up 10.5% of Swedish exports, 11.4% of Norway’s and 17.7% of Denmark’s, according to Rothschild’s figures.

And despite the repair work that has been done to regional banks’ balance sheets, there remain areas or particular concern.

Danish Banks

“Like the UK, Denmark has instigated a failing bank resolution regime that can impose losses on their debt holders,” Stewart said.

“[On 2 March] they announced a new bank package (#5) that will help with bank funding, whilst making capital available to improve lending to the agriculture sector and exporters. The fact this package provides funding relief to a troubled Danish bank, FIH, suggests its domestic financial institutions are still being treated with caution in markets.”

“We recognise that the stronger banks in the region are not in Denmark. However we believe the Danish sovereign will maintain its AAA rating. There are risks from residential property markets in Norway and Sweden, where prices have risen quickly and affordability measures have worsened, and we recognise that these governments at some stage may be forced to take regulatory action to address a developing risk.”

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