Nordic equities – Continued consolidation
Despite unstable economic conditions, earnings growth for Nordic listed companies is strong. After more than two years of weak leading indicators, a recovery should not be far off now. That may spark renewed interest in companies in cyclical sectors and small cap stocks. Lower key interest rates will help support both the stock market and the economy, especially highly leveraged companies and economic sectors with credit-driven demand. Meanwhile we see a significant risk that political risks may create turmoil in the market later this year. Valuations are neither attractive nor off-putting and will probably not play a decisive role in stock market performance in the near term. One possible exception is Nordic small caps, which now look relatively attractive; we saw great interest in them earlier this summer. This stock market segment is also more exposed to a likely improvement in the local economy and to lower key interest rates. All in all, we expect continued consolidation in stock market indices for the rest of the year, but with episodes of volatility – much like their performance over the past six months. During this period, leadership in the stock market will rotate from defensive to more cyclically sensitive sectors.
Almost time for cyclical sectors again
After a long, deep downturn, a recovery in leading indicators should come relatively soon, especially if the risk of a new financial crisis is considered low. Central banks have now begun to cut their key rates. A new upturn in leading indicators will probably boost share prices mainly in cyclical sectors. Such movement often comes first in the stock market and is only subsequently confirmed by other indicators.
In our view, forest products, industrials, commodities, consumer durables and small caps should benefit most when leading indicators eventually rebound. Until then, the situation will probably continue to benefit health care, staple goods and telecoms. Leadership in the stock market should rotate before year-end; it may swing back and forth a few times, which may contribute to volatility for brief periods.
Good earnings growth, despite a tough economic environment
Earnings forecasts were broadly revised upward after the Q1 report period, although for the Nordics as a whole this was completely overshadowed by downward-revised forecasts for the Norwegian oil industry (due to lower oil and natural gas prices). Unfortunately, the positive earnings revision trend has not been sustained; since the Q2 report period, small downward revisions made in Sweden and Finland outweigh upward revisions in Denmark and Norway.
However, we still expect good corporate earnings growth throughout the Nordic region in 2025 and 2026 as well as earnings growth of just under 10 per cent in Sweden and Norway this year, more than 30 per cent earnings growth in Denmark, but a downturn of about 10 per cent in Finland. The upturns are from already historically high 2023 earnings levels and must therefore be considered really strong, given the rather unstable economic situation. With a little more tailwind from the economy and interest rates, it is easy to be optimistic about the earnings outlook for 2025 and 2026.
We see a clear risk of new setbacks, and periods of heightened stock market volatility may be triggered by political developments during the rest of 2024. We see a clear risk of new setbacks, and periods of heightened stock market volatility may be triggered by political developments during the rest of 2024.
Up and down for small caps
Interest in small cap stocks has grown substantially this year, and for several weeks in July they were also red-hot internationally after years of stagnation and underperformance against large caps. Economic worries in early August quickly cooled down interest in these companies, but we believe their performance is well worth monitoring going forward. A combination of interest rate cuts and rebounding leading economic indicators could well spark interest in small caps again. Small cap companies often have greater exposure to the local economy. Nordic households have relatively high levels of variable-interest rate debt, contributing to higher interest rate sensitivity and quicker reactions to rate changes. This has been a disadvantage for Nordic small caps in recent years but should be an advantage in 2025.
Esbjörn Lundevall
Equity Analyst, Investments