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Overlooked Nordic stocks attract euro-weary investors
By Reuters
Tuesday, July 15, 2014 Email this story  |  News Tracker  |  Reprints  |  Printable Version

LONDON (Reuters)—Overlooked stocks in the Nordic region are attracting increased attention from investors seeking to escape the stretched valuations and uneven growth of the eurozone.

While investors are faced with market peaks in the currency bloc, though economic performance remains muted and patchy, Nordic markets are still trading below historical premiums despite solid public finances and a robust showing by companies – including strong monthly sales on Tuesday [July 15] from Swedish fashion firm Hennes & Mauritz.

Danish stocks have outpaced all European peers this year as investors pile into the only market where profit expectations are rising, thanks to a recovery in the banking sector and turnaround stories such as turbine maker Vestas Wind.

Sweden is also peppered with overlooked restructuring plays such as Husqvarna, a maker of lawnmowers and chainsaws, or lock-maker Assa Abloy, which offers exposure to the United States and Europe at an attractive valuation, according to some fund managers.

"It's about trying to find those stocks that have been overlooked," said Waverton Investment Management's Katrina Norris, who has invested a quarter of her European equity fund in Scandinavia.

Nordic stocks trade at a smaller valuation premium to Europe than their historical average. The MSCI Nordic index of Scandinavian stocks trades at a 9 percent premium to its pan-European counterpart based on expected earnings, compared with a 10-year average of 12.6 percent.

Among single stocks, Assa Abloy's premium to its sector is half of its average since 1995.

"These stocks seem to be attractive value for us, and there's potential for them to improve return-on-capital-employed and growth prospects as well," Norris said.

Swedish companies that export globally, such as mining-machinery maker Atlas Copco and bearings firm SKF, are also expected to benefit from a weaker currency on the back of an interest-rate cut by the Swedish central bank earlier this month.

The Swedish crown has lost almost 1 percent against the euro since the rate cut, offering support to industrial exporters, Danske Bank Senior Strategist Mattias Sundling said.

Turnaround Potential

There are notes of caution, however; estimates from top-rated analysts show a high risk that Norwegian companies' second-quarter results could be disappointing, according to StarMine data.

Bearish hedge funds are also placing bets that some are set for a fall. Nordic stocks including Norwegian Air Shuttle , Finnish elevator maker Kone and Atlas Copco account for 12 of the 15 most shorted stocks in Europe ahead of their quarterly earnings, Markit data showed.

Still, even for firms with earnings headwinds, investors highlight the potential of successful cost-cutting or restructuring stories in Scandinavia such as Norway's Statoil , Finland's Nokia and Denmark's Vestas Wind.

Vestas, which has gone through a major restructuring to reduce its output, and jeweler Pandora, which has benefited from a strategic shift to cheaper products, have respectively seen their shares rise 60 percent and 40 percent year-to-date.

Coloplast, the world's largest maker of ostomy and continence care products, has also reaped the benefit of its recent restructuring and raised its full-year outlook on the back of strong organic revenue growth.

The company's shares have risen more than 30 percent this year, taking their gains since 2009 to more than 500 percent.

"Looking at these three businesses together, they're clearly very different, but they are very strong franchises, all making potentially very good margins, and they just needed not to screw up," said Jim Campbell, European small cap fund manager for J.P. Morgan Asset Management, who expects them to keep on outperforming.

By Francesco Canepa


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