The Nordic bloc of five countries and 30 million people is attracting the interest of investors for multiple surprising reasons.
Each of its countries, Sweden, Denmark, Norway, Finland and Iceland, has its own culture and take on politics, but what they share is more than a good vibe; it’s well-educated citizens, economic momentum, and savvy entrepreneurs. Sweden and Iceland have the highest numbers of tech “unicorns” outside the United States and Israel.
Long known for having generous socialistic states, the reality is quite different, as you can see from the debt map below, with the darker blue areas having less debt measured as a percentage of GDP.
The politics of government spending in the region is also changing with tougher rules on deficits, a more independent central bank, and national pension systems that adjust to longer lifespans.
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The bloc is also increasing its defense spending as Russia threatens its territory, China threatens its economic security, and as it must count less on America. They are integrating their economies, defense industries and militaries with each other and Europe.
Last year, Denmark and Norway each spent more than the U.S. on defense as a share of GDP, according to the Stockholm International Peace Research Institute.
The Nordic countries are closely tied to Germany, which leads the European NATO members in defense spending, as well as technology, manufacturing, and industry. I like Rheinmetall AG (RNMBY), which has strong order flow from the Ukraine conflict and NATO countries that are rebuilding their defense spending and industry. Rheinmetall remains at a sweet spot of growth, benefiting from higher NATO defense spending on ammunition, shipbuilding, electronics, unmanned systems and secure satellite communications.
The Stockholm Stock Exchange, also known as Nasdaq Stockholm, is the primary securities exchange of the Nordic countries. Founded in 1863, it is also a regional key hub for European capital markets.
Sweden has reduced public spending, cut the top marginal tax rates, and lowered taxes on property, gifts, wealth and inheritance. Sweden is bigger than Denmark and less state-dominated than Norway. Denmark has recently run surpluses, enabling the government to offer voters a hefty cut in electricity taxes.
Let’s focus on finance and economics to highlight Nordic power.
To begin, Sweden has about twice as many billionaires per capita as the U.S. and has a “stock culture,” with 22% of its citizens owning shares directly and – in contrast to our Social Security Trust Fund – a healthy allocation of stocks in its national pension plan. On the debt side, Sweden’s debt-to-GDP ratio is just above 35%, compared to America’s 102%. Not bad at all.
Denmark and Sweden, in particular, punch above their weight globally thanks to multinationals such as Denmark’s Novo (NVO) in weight-loss drugs, and Ørsted (DNNGY) in wind farms. Novo is now trading at a little more than 10 times earnings and offers us a return on equity of over 60% as well as ongoing share buybacks and pipeline flexibility.
Sweden offers Spotify (SPOT) in music streaming, and Saab (SAABY) in auto and defense, as well as H&M (HNNMY), Nordea Bank (NRDBY), Swedbank (SWDBY), and SKF (SKFRY).
Then there is the iShares MSCI Sweden ETF (EWD). This ETF is heavily weighted towards industrials at 45% of the basket, followed by financial services at 24%. It is fairly concentrated, with the top ten stocks comprising about 55% of its total value.
There is also an iShares MSCI Norway ETF (ENOR) that captures the dynamism of this booming energy and maritime country, reflected in this ETF’s tilt to oil and hydro energy and finance.
The Cabot Explorer searches for the best stocks throughout the world, including America. Find out our best Nordic stock pick in a forthcoming issue by subscribing today.
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