Evli's Chief Strategist Valtteri Ahti, Nordic Equity Analyst Ville Tiainen and Head of Fixed Income Juhamatti Pukka, discussed the key market themes and outlook for the upcoming year.
Macro views on Nordic markets
Key market themes: strong earnings and inflationary pressure
The end of this year is looking very positive. We're in the midst of a strong earnings season and the world economy is basically running at double the speed it normally runs. The Nordic economies are no exception, so we're seeing robust growth in all the Nordic economies.
Heading into next year, it’s going to be a bit trickier, more of a Jekyll-and-Hyde year: the first half is going to be a continuation of the strength witnessed at the end of this year, which means extremely rapid economic growth, and also quite a bit of inflationary pressure. In the second half, we expect a slowdown in the rates of economic growth towards longer-run trends and a gradual dissipation of that inflationary pressure which is hitting the world economy right now.
The Nordic markets look relatively strong in the current environment
The Nordics have performed extremely well despite Covid-19, and the reason is because the Nordic economies suffered a far smaller drop in terms of economic activity than the rest of the world and the rest of Europe. That's why our bounce back hasn't been as fast because we just didn't fall as far as others did to begin with.
Furthermore, the Nordic populations have far higher vaccination rates than most OECD economies. Thus, we anticipate a lot less risk in terms of any Covid rebound, either through altered virus strains or mutations. We're also looking at robust growth in essentially all the Nordic economies, particularly in Norway. Sweden is growing rapidly, and Finland is also bouncing back quite nicely. We're even seeing, for example, that the Norges Bank has already raised interest rates and is looking for another interest rate hike. Therefore, the Nordics look relatively strong in the current environment.
One theme to remember from this year in the Nordic markets is definitely the increasing number of IPOs, especially in Finland and Sweden. The main driver behind the listing activities is the excess liquidity and resulting elevated multiples that we’ve been seeing during at least the last couple of years. Furthermore, we think structural factors play an important role in this phenomenon, especially in Sweden. Indeed, Sweden has a unique ecosystem where, in addition to traditional big-ticket institutional investors, there are smaller professional investors that provide capital and liquidity for these aspiring younger companies. Plus, according to Bloomberg, Sweden's capital Stockholm has bred more unicorns per capita than any other region in the world, save for Silicon Valley. So, there’s something really special in Sweden and especially in the small and mid-cap segment when it comes to listed equities. In 2022, we think IPOs will continue, both in Finland and Sweden, but we would be more mindful about the quality and valuation of the upcoming IPO candidates.
Nordic Fixed Income
A positive year for the Nordic Corporate Bond Market
The year 2021 has thus far been very good for the Nordic corporate bond market and investors’ demand for this asset class has been increasing. Also, the performances have been stable. The secondary market demand is very high, so it’s been a very difficult market to buy bonds and the primary market activity has been a little bit below our expectations. Structurally, the demand for new bonds has been much greater than the supply to the market, so that’s very good for the secondary market and for the performance of corporate bond portfolios.
Nordic Issuing companies have faced the Covid-19 crisis
For their part, Nordic bond issuing companies have beefed up their balance sheets since the beginning of the Covid-19 crisis. The crisis was a big shock for the Nordic companies, and they started to focus on their cash flow to defend the balance sheet and trying to get the business running while facing all of these containment measures that are putting some limits on doing business.
Nordic companies have been doing a great job and we are expecting this to continue also during next year. Those companies have been active; they have been refinancing the upcoming maturities while the funding is very cheap to obtain from the capital markets. Thus, Nordic companies have been issuing new bonds and refinanced the next two-to-three-year maturities, pushing the wall of maturities much farther. Also, they have taken off the big spikes in the maturity profiles.
Nordic Fixed Income markets stand out on potential total returns
The low-yield environment has been a mantra continuing for years that has meant that fixed income is not offering any meaningful returns for investors. But we beg to differ because the yield spread difference is actually putting the Nordic market at quite an attractive spot in relative terms. In 2022, investors should be able to make very good total returns in the Nordic corporate bond market. It's getting more and more difficult to make positive total returns in fixed income in this cycle, and the Nordic market is one of those that really stand out for its potential to provide total returns.