No other European country is as dependent on oil price movements as Norway. As crude oil prices tumbled in 2015, storm clouds started to gather over the $524bn economy. In the meantime prices have recovered to some extent and the storm appears to have caused less damage than first feared.
In the fourth quarter of 2015 economic output dropped (-1.3%), although the negative performance was confined to this one quarter. The economy already started to recover in the first quarter of 2016 (+1% on the previous quarter). In the second quarter it gained further momentum and performed more strongly than expected, finishing 0.4% up on the first quarter. The Norwegian central bank can obviously see some light at the end of the tunnel. Contrary to the announcement made at its meeting on 23 June, no further cuts in interest rates are planned this year. The central bank is predicting an interest rate of around 0.5 per cent over the next few years.
Hopes raised of an increase in oil prices
Although oil prices have recovered, they are still more than 50% below their 2014 level. OPEC raised hopes of an increase in prices by cutting production by 750,000 barrels a day. However, DNB analyst Thorbjorn Kjus warns against expecting too much. He explains that, on the one hand, production has not been cut by enough, given that inventories are at bursting point, and, on the other, there is still considerable uncertainty on the markets.
This can be attributed primarily to the rivalry between Iran and Saudi Arabia. Iran has even increased production since the last OPEC meeting. It is also unclear whether Saudi Arabia will be willing, as in the past, to cut production on its own. Furthermore, Donald Trump’s election victory has temporarily driven down oil prices. During his campaign Trump said that he would boost shale oil production and eliminate America’s reliance on oil imports altogether.
Sovereign wealth fund drawn on for the first time
The Norwegian government is trying to counter the negative effects of the decline in oil prices with stimulus programmes. To finance these, for the first time in history it has taken funds out of Norway’s sovereign wealth fund (Statens pensjonsfond utland), into which revenues generated from the oil sector have been paid since 1996. In 2016, NOK95.7b are being withdrawn from the fund. This figure is set to rise to as much as NOK121.2bn in 2017.
Almost a third of the market capitalisation of the Oslo Stock Exchange is accounted for by the oil industry. Within the combined investment universe across the entire Nordic region, however, equities from the energy sector represent a share of less than four per cent, which is even lower than the European or global average.
Since March, Norway’s leading index, the OBX, has been on a path to recovery. Overall, the Scandinavian markets have performed impressively in recent years. The Scandinavian VINX Benchmark Capital Price Index NOK rose by almost 37% over the 100 months between 31 March 2008 and 29 July 2016, which corresponds to an annual return of more than 3.8%.
Even more impressive still is its performance with dividends reinvested (increase of almost 81%). The annualised return with dividends reinvested was close to 7.4%. Over this same period the Eurostoxx 50 Index fell by 17.6% (-2.14% annualised), although with dividends reinvested it was up by 19.3%. On an annualised basis this represents a rise of 2.14%.
Overall, the VINX generated an additional annual return for investors of 5.2% compared with the Eurostoxx 50, said Hagen-Holger Apel (pictured), economics graduate and portfolio manager, who advises international investors at DNB Asset Management in Luxembourg.
Scandinavian markets respond calmly to Trump’s victory
The VINX Benchmark Capital Price Index is composed of the biggest and most-traded equities on the Nordic Exchange and Oslo Stock Exchange. Swedish equities are most strongly represented within this index with a share of 46%, while 24% of the equities are listed in Denmark, 16% in Finland and 9% in Norway. As much as 75% of the index is quoted in Scandinavian currencies.
Anyone investing in the region over this period who was prepared to accept currency risks was rewarded with additional returns, explained Hagen-Holger Apel, referring to the now slightly weaker Scandinavian currencies.
The VINX Benchmark Index responded to the result of the US presidential election with a moderate rise in the first few days of trading after the vote. Following a weak start to the month, the Nordic stock indices therefore moved slightly into positive territory.
Wealth of quality companies
Although Scandinavia is small in relation to Europe as a whole, investors will find a wealth of extremely well-managed, quality companies here. A total of 149 companies are listed on the VINX Index. Scandinavia benefits from stable political and economic conditions, a high level of education and access to new technologies. Specialised investment funds are recommended for investment in the Scandinavian economies, as they cover the entire market and are managed locally.
For investors who are keen to minimise interest rate risks, due to the prevailing uncertainty in the area of interest rates, while at the same time taking a position in a Scandinavian currency, high yield could be an interesting option. A short duration and an investment in Norwegian kroner is attractive for many investors in the current environment, added Hagen-Holger Apel, who believes that the uncertainty in the eurozone has made investing in the Scandinavian economies attractive again.
DNB took part in the Nordic Investment Managers Forum in Luxembourg in October 2016. Click here for further details: http://www.investmenteurope.net/tag/nordic-investment-managers-forum/