Investors Grab Sinking Returns Amid Scandinavia Recession

Recession-Beset Scandinavia Seen as Least Ugly as Returns Sink
Swedish growth is stalling as exporters such as Volvo AB and Ericsson AB fire thousands of workers. Photographer: Andrew Harrer/Bloomberg

The onset of recessions in Scandinavia is proving no deterrent for bond and currency investors reduced to sifting between Europe’s least ugly markets.

Even negative returns, driven by record capital inflows, haven’t put off buyers eager to protect their principal rather than risk losses on euro-denominated securities.

“From a credit perspective, the current set-back in economic indicators in the Nordics doesn’t change the fact that the region is looking very good relative to the rest of Europe,” Thomas Clausen, chief investment officer at Alfred Berg Asset Management in Copenhagen, said in an interview.

The economies of Denmark and Finland have both suffered contractions this year, while Swedish growth is stalling as exporters such as Volvo AB and Ericsson AB fire thousands of workers. Norway and Sweden may be in the grip of housing bubbles, according to government agencies in the two countries. Denmark has yet to recover from a burst real estate bubble that’s triggered more than a dozen bank failures since 2008. Yet investors continue to pour in.

Record Premium

Foreign holdings of Swedish bonds and money market instruments rose to 3.23 trillion kronor ($483 billion) as of June, from 2.09 trillion at the end of 2007, central bank data show. Foreign investors bought 163 billion kroner of Norwegian securities in the first half, double the total amount purchased through all of 2011, the Oslo-based statistics office estimates. Purchases of Danish krone denominated bonds jumped almost five-fold in September to 21.4 billion kroner, from a year earlier, according to central bank data.

Denmark plans to exceed its 100 billion-krone ($17 billion) guidance for borrowing this year, holding an auction next month on a date that had been set as tentative for an extra bond sale. The yield on the country’s 10-year note slid to 1.105 percent today, 31 basis points below similar German yields, a record premium on the bond.

“Scandinavia as a whole is still a good place to be,” Magnus Nilsson, who helps manage $2.3 billion at Catella Avkastningsfond in Stockholm, said by phone. “If you look at the major markets, the U.S., Japan and some specific European countries, it’s quite an ugly scene.”

‘Best in Class’

As money has flowed into Scandinavia, economic output has sagged. Denmark’s gross domestic product shrank 0.4 percent in the second quarter and Finland’s economy contracted 1.1 percent in the same period, according to their statistics offices.

Norway’s economy, excluding income from oil and gas, slowed to 0.7 percent from 0.8 percent in the period, while the nation’s total economic output fell 0.8 percent. The economy of Sweden -- where exports make up half total output -- grew 0.7 percent in the second quarter, yet its manufacturing industry has contracted every month since August.

“I think they are heading towards contraction, but not that this means they are losing their appeal,” Par Magnusson, chief Scandinavian rates strategist at Royal Bank of Scotland Group Plc in Stockholm, said in an e-mailed reply to questions. “They are still the best in class.”

Olav Chen, a senior portfolio manager at Storebrand Asset Management in Oslo, who oversees about $7 billion, is betting “Sweden’s safe haven status would survive a slowdown,” he said in an e-mailed reply to questions.

AAA Rated

The four Nordic countries, all rated AAA, boast public debt loads that are less than half the euro-zone average. Norway, which is backed by a $660 billion sovereign wealth fund, has no net debt. Credit default swaps on bonds sold by the four nations trade on par with or below similar swaps protecting against a default on German debt. Default swaps on Norway suggest the oil-rich nation is the world’s safest credit.

DNB ASA, Norway’s biggest bank, has fielded calls from international investors looking for somewhere to protect their holdings, Chief Financial Officer Bjoern Erik Naess said. That’s helping boost deposits and reducing the lender’s reliance on wholesale funding, he said.

The influx of international deposits “is at a significantly higher level than a year ago,” Naess said in a telephone interview out of Oslo. “We have seen growth in deposits from international clients, both on personal deposits from households as well as from corporates. The third source of increased deposits, in particular short-term deposits, has been from institutional investors, such as hedge funds and money market funds.”

Returns Evaporate

Demand for Scandinavia’s bonds and currencies has persisted even as returns evaporate. Denmark pays less than Germany to borrow over 10 years, while Sweden’s 10-year note yielded 1.51 percent today, less relative to bunds than any euro member. Norway’s similar-maturity debt yielded 2.17 percent. Denmark charges investors to hold its two-year debt, which yielded minus 0.156 percent as of 3:21 p.m. local time.

Investors in the Nordics have tolerated record-low yields as prospects of a euro-zone recovery darken. Services and manufacturing confidence in the 17-member currency bloc, which slid into a recession in the second quarter, shrank for a 10th consecutive month in November, a composite index based on a survey of purchasing managers showed on Nov. 22.

One-Eyed King

A solution to the euro zone’s debt crisis looks remote as political wrangling continues to stall progress. Europe’s leaders have so far failed to reach agreement on continuing Greek aid while talks on setting a budget for the 27-member European Union are showing signs of faltering. France lost its top credit grade at Moody’s Investors Service this month as the rating company warned fading growth prospects will hurt the fiscal outlook of Europe’s second-largest economy.

“In the land of the blind, a one-eyed man is king,” Daragh Maher, a currency strategist at HSBC Holdings Plc, said in a phone interview. “Maybe this is how the markets should view Sweden.”

In the Nordics, only Finland is in the euro. Sweden is an EU member with its own free-floating currency and Denmark pegs the krone to the euro. Norway, like Switzerland, has opted to stay outside the EU altogether. Exchange rate flows have prompted speculation that Norway’s krone and Sweden’s krona might even replace the Swiss franc as haven currencies.

Relative Concept

The Swedish krona has appreciated 8 percent against the euro in the past 12 months and Norway’s krone is up 7 percent in the period. The appeal of the two currencies grew after the Swiss National Bank in September last year capped the franc’s exchange rate versus the euro to fight a capital influx. Denmark has resorted to negative policy rates to protect its peg.

“Currencies are a relative concept,” David Bloom, global head of currency strategy at HSBC Holdings Plc in London, said in a telephone interview. “Foreign exchange is: what are you like compared to someone else? That’s all that matters.”

According to Bloom, “Norway is the best currency in the whole wide world. My love grows deeper” when contrasting the situation in Norway with the political brinkmanship over fiscal policy in the U.S., European bailout talks and even the U.K.’s “fiscal predicament,” he said.

Investors entering Nordic markets at the height of Europe’s debt crisis “were attracted by the strength of the fundamentals and lack of alternatives in the first place, and that has not really changed,” Henrik Gullberg, a London-based foreign-exchange strategist at Deutsche Bank AG, the world’s biggest currency trader, said in an interview.

HSBC’s Bloom argues that even signs of economic weakness in Scandinavia shouldn’t keep investors away. “Whatever it is, you cannot frighten me,” he said.

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