Here below a fundamental economic report providing an economic outlook on the Nordic region care of Nordea.

The report makes clear the lower growth projections for Sweden and Denmark for 2013. Norway is set to expand more rapidly than 2012 and Sweden more slowly. Both events will each create interesting dilemmas for their central banks especially as both their housing markets are in bubble territory now. Sweden needs lower rates for her economy but higher rates for her housing market and the reverse is true for Norway.

Nordic equities have suffered in the last quarter of this year as growth projections have on aggregate declined. This is producing some cheap valuations relative to international comparisons which i’ve recently picked up on in the forum pages. Nordic public finances remain very strong and structurally their economies are in decent shape with generally balanced budgets and balanced or surplus trade conditions given the oil and nat gas revenues.The evidence suggests any housing related shock to the Nordic area will be met by increased government spending so corporate suppliers to the public sectors should be relatively protected.

If the public sector finances are strong the opposite can be found for the Nordic consumer. Consumer debt to income ratios across the Nordic region are worryingly high and continue to increase. Debt to income levels driven by a house price boom and lose lending by Nordic banks continue to reach new nominal world wide historic highs.

 

Higher interest rates are needed to tempter the Nordic house price bubble but the currency inflow implications of this are too dire for Nordic central banks to implement. (The same phenomena can be seen in Canada which is starting to suffer from the same bubble in consumer debt to income ratios driven by her central bank artificially keep rates too low). Protectionism or implementation of the Swiss model, pegging their currencies to a blend of the US$ and Euro becomes more likely as the dilema between growth, bubbles and currency inflows continue.

These sorts of ratios above are only sustainable in Norway due to their natural resource income streams (and sovereign wealth fund). Unemployment benefits and mortgage relief in Norway are large and so shocks to the Norwegian housing market have always been muted. For as long as oil and gas revenues remain strong the Norwegian bubble in consumer debt and house prices looks likely to sustain.(Note, less than 10% of Norway’s mortgages are fixed rate).

Sweden is not much better though and lacks Norway’s natural resource and sovereign wealth reserves. Household debt to disposable income levels for Sweden are at 173%. Interestingly this debt is concentrated in Sweden’s richest 20% of the population who hold over 60% of the consumer debt burden.

Here Reuters on Sweden’s dilemma.

http://www.reuters.com/article/2012/11/05/sweden-centralbank-idUSL5E8M1CML20121105

And here Nordea’s 2013 Economic report.

NordicRegionOutlook2013

My own view.

Like all investments its about balancing relative strength, upside & risk. World monetary stimulus is likely to debase most developed world currencies vs real assets. Central banks continue to be focused on debasing their currencies collectively vs real assets. The inflationary deflation route to purging debt from their systems. If you accept this theme, the Nordic block can sustain their high debt consumer debt levels so long as interest rates remain at low levels. The NOK continues to look very strong and yield compression should be seen in local currency equities. Remember rates on yielding nok and sek assets are extremely low. Bond are at negative real rates. Commercial and residential property assets also offer negative real rates of return. Only equities in the region offer positive returns. Relatively, on this basis, they offer value. Importantly, central banks in the region are unlikely to lift rates any time soon and will instead try and control their runaway housing markets by raising bank capital ratios etc.

The OMX30 Swedish index has done nothing since mid Feb 2012. The index peaked in April 2011 along with the commodity index and since has been struggling to regain this prior level. (The correlation to the commodity complex is high for much of the components of the Nordic exchanges). This current up draft is the third attempt at this level and is therefore bullish for a breakout in the seasonally strong new year period to March April 2013.

 

Timing is everything of course. When the rate cycle turns the downside risks are clear for the Nordic area given the household debt ratios. Given most mortgages are on variable rates any rise in interest rates would badly crimp consumer demand. Savings rates are high across the Nordic region (unlike the US and UK by example). This suggests a deleveraging shock  is unlikely in the short term but  a prolonged rise in interest rates beyond rises in incomes would inevitably eventually lead to debt leveraging across the region.  This would have severe implications for the region’s banks and built asset markets.

In summary my own book  is maintaining a small allocation to the Nordic region’s yielding corporates holding the equities long with local currency cash. This allocation plays the local currency appreciation as well as yield compression in the region. Both themes are likely to remain and strengthen for 2013, in my view.

 

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