Will the second half of 2025 be better for Nordic equities?
Weak economy but hopes of a turnaround
Leading economic indicators continue to paint a gloomy picture for Europe, while signs of a turn for the better in the US are still far from clear and the real estate crisis in China continues to weigh down growth. At SEB’s major investor seminar in Copenhagen in early January, the approximately 160 Nordic listed companies attending the event painted a very clear picture. Demand remains weak and no real economic upturn was discernible yet at the start of the year, but nearly two thirds of these companies hope for an upturn in 2025. More than half of them regard weak demand as their biggest problem today. Excluding companies in sectors with limited cyclical sensitivity, such as pharmaceuticals and pharmacy chains, the picture is even clearer.
But one category of companies that has already started to show some optimism ‒ as evidenced during the current quarterly report season ‒ is those with an exposure to Swedish consumers. This is especially true of segments that had the roughest time in 2022 and 2023, for example residential renovations and home furnishings.
Swedish listed companies had mixed messages about the US outlook, but many American large caps seem hopeful that deregulation will contribute to faster economic growth in 2025. American small caps are even more optimistic; the small business optimism index compiled by NFIB, which represents these companies’ interests, climbed dramatically in late 2024. After having fluctuated around historically low levels for more than two years, in the space of three months the indicator rose to its highest level since 2018 in December. The correlation between the small business sector and the economy as a whole is far from perfect, but historically the NFIB has signalled major changes in key leading indicators on numerous occasions. This further bolsters our view that a positive change in leading indicators is imminent, at least in the US.
We still expect that an upturn in leading indicators in Western countries will be positive for Nordic stock markets. Cyclical sectors in particular are expected to benefit when clearer signals of a better economy have materialised.
Equities exposed to Sweden and US at an advantage
We are sticking to our view that many companies with an exposure to Sweden’s domestic economy have relatively good prospects in 2025. This is especially true of companies in the housing, construction and consumer discretionary sectors with a large share of their revenue in Sweden. Companies that have adjusted their cost structures after the difficult years now behind us could see a significant boost in profitability during 2025 when demand recovers. The start of the Q4 corporate report season has also provided good support for this view.
Companies that generate a large share of their earnings in the US may also benefit from a better business climate on the other side of the Atlantic. But this requires that companies have planned well for tariff hikes and preferably have mostly local US business operations rather than an import-based business model. Although the risk of higher US import tariffs has been well known for a relatively long time, there seems to be great variation in how prepared the Nordic industrial sector is. At SEB’s investor seminar in Copenhagen, some – but far from all – companies were crystal-clear about how they would manage future tariffs. A number of business executives were evasive about how they would handle the threat and still seemed to be hoping for the best, rather than having concrete plans for how to adapt their purchases and delivery chains.
Discounted Danish share prices lowering Nordic P/E
At the end of June 2024, the price-earnings (P/E) ratio for the Nordic region was 15 per cent above its 10-year average and the highest in three years. This was largely explained by the high valuation of the Danish pharmaceutical group Novo Nordisk, Europe’s largest company in terms of market capitalisation and the stock with the biggest weight in the Nordic index ‒ more than 25 per cent. Because annual earnings growth at Novo Nordisk is expected to be about 25 per cent for many years, this was not particularly alarming or troubling as such. However, since then the news flow has not been favourable to Novo Nordisk, and its share price has plummeted.
Still, it is worth noting that so far nothing concrete has justified lower earnings forecasts for 2025 or 2026. A lower share price and continued expectations of strong earnings growth for the next few years have pushed down the P/E ratio for the Nordic region as a whole to just under 17 in our forecast for 2025. This is marginally below the 10-year average.
Swedish large caps are valued at a P/E of 17, a slight premium against the Nordic average. That difference is small, but the current premium for Swedish equities relative to the Nordic average is the highest since 2016.
