Fishing for Value in the Fjord


The economic outlook for 2020 is far from clear, especially with deepening concerns on the effect of the coronavirus which may affect global growth and dampen the earnings on companies.

The European Commission described the outbreak and spread of the coronavirus and its economic impact as a key downside risk. However, the interpretation on the effects of such a virus has been totally different for the majority of global markets. In fact, US and European markets continued to rally and reach all-time highs. In my opinion, investors and markets have downplayed the consequences of the coronavirus, particularly for those companies dependent on stock supplies coming from China. The closure of factories in China could lead to disruptions in the supply chain model for worldwide companies leaving them with no other option, but to find new counterparties at possible higher costs. Additionally, companies that have revenue segmentation in China may be hit by lower demand.

At the same time, elevated trade-policy uncertainty and geopolitical tensions continue to weigh on global growth prospects. Should investors have discounted a higher risk premium towards risky assets, when the news broke out? It comes to no surprise that Apple warned on Monday 17th February 2020, that it was unlikely to meet its March quarter sales guidance. If other major companies communicate the same sort of message, then global risk sentiment increases. Therefore, a portfolio, that is selective in asset allocation and has an element of underlying that provides insurance, remains key.

Since the virus outbreak, we have seen a clear disparity in equity market returns, as the Western region progressed while the Asian, LATAM (Latin American), Emerging and GCC (Gulf Cooperation Council) regions all fell. One of the few European equity markets that declined was in fact the OBX index (Norwegian equity market). At face value, one may be wary and this should instigate an alarming bell on the outlook of Norwegian assets. However, in my view, this does not mean that one should look at the Norwegian market as a finished article.

It is no surprise that with the coronavirus, one sector that got hit is the energy sector, since China is a net importer of oil. With the OBX index composite holding around 25% in the energy sector, the index fell on a Year-To-Date basis. While several commentators believe that oil prices should remain weak, for at least the first half of the year, one may argue that on a risk-adjusted basis the Norwegian model may still offer value over some of its European peers.

As a start, the economic conditions in Norway remain healthy despite the uncertainty on the country’s main revenue source, oil. The transition effects of having the Norwegian oil industry cut direct emissions from operations in the Nordic country by 40% by 2030 and make them almost carbon neutral by 2050, as pressure on climate change intensifies, remains to be seen. However, as also reported in The Economist, there has been a discovery of Johan Sverdrup, a giant new oilfield in the North Sea, whereby production could earn Norway an estimated $100bn over the next 50 years.

On another note, the country had already been taking measures to diversify away from its main source of revenue, and that was through the creation of the $1.2 trillion sovereign wealth fund – the world’s biggest, which was set up in 1996. Until then, oil revenues had been spent as they were earned. The Government Pension Fund Global and the fiscal rule have since 2001 set out the plan for the phasing-in of petroleum income and investment returns to the Norwegian economy. Interestingly, the Financial Times reported how the wealth fund held a record amount of equities at the end of June, with 69.3% of its assets held in equities, up from 66% at the end of 2018.

So far, the fund has been a success story – even on the adaptation of when to increase exposure into risky assets from 40% to 50% “during or after” the 2008-09 financial crises. The fund, which on average owns 1.4% of every listed company worldwide, created a wealth effect. When one analyzes the equity composition from the report of Norges Bank in 2018, close to 70% of the Norges Bank fund underlying is dependent on two countries; United States (41%), followed by the UK (27.5%). The third largest exposure is coming from Japan while France has the highest exposure from the EU region.

The fund has the least exposure towards the Middle East. When looking at the exposure it holds in the United States the top 4 equities held are all in the Tech sector being Microsoft, Apple, Alphabet and Amazon. In its equity portfolio the fund only holds a total of 6% of its total assets in energy, with the largest exposure coming from UK companies, being Royal Dutch Shell and BP.

Norway is renowned for being one of the highest exporting seafood country, and even though the industry has its own challenges, especially in relation to the European Commission’s possibility of slashing fines due to salmon farmers alleged price fixing, the outlook on salmon farming remains strong, especially due to the disruption coming from Chile (exports from Chile, the world’s second-largest salmon-farming nation, fell by double digits in October as political protests affected processing and distribution sites). According to the “Global Salmon Market, by Species, Importing Countries, Exporting Countries, and Pricing Analysis” report the Global Salmon Market will surpass 4 Million Tons by the end of the year 2025.

Additionally, Infrastructure will be the growth segment of construction in the Nordic area. Based on data quoted by Finnish builder YIT, Norway will spend about 8 billion euros on transport infrastructure and roads in 2019, almost double 2014’s level. The large investment being made on infrastructure could lead to stability in the construction sector.

On a separate note, Electric cars’ share of new registrations in Norway surged to a record in 2019, helped by Tesla Inc.’s best year ever in the Nordic country. Norway is the world’s largest adopter of electric cars per inhabitant, pre-dominantly due to tax exemptions by the government Battery electric cars accounted for 42% of new car sales in Norway last year, up from 31% in 2018, the Norwegian Road Federation mentioned.

The Norwegian krone (NOK) has disappointed over a 12-month period as the dollar and the sterling rose (+8%) over the period versus the Norwegian krone. The euro also rose (+3%) for the period. While the NOK is a currency that tends to perform well in a risk-on environment, one may question whether Norway’s fundamentals are being ignored.

Backed by the world’s biggest sovereign wealth fund, Norway has pumped out much more fiscal support than its European neighbors. Unlike neighboring countries Sweden and Denmark, Norway never experimented with negative rates – nor did it ever try out measures such as quantitative easing.

While externally downside risks may continue to persist, driven by coronavirus-related news, ceteris paribus, even on a historical basis the krone is looking cheap when compared to its 5 and 10-year moving averages. Analyzing the Bloomberg consensus on the projected budget surplus as a percentage of GDP, which is expected to be at 7.3% this year, compared to a projected deficit of 4.8% in the U.S, along with a deficit of 1.1% for the eurozone, selective Norwegian assets may still offer value on a risk-adjusted basis.


Mark Muscat, B Com (Hons) (Banking and Finance), M Sc (Melit), is a Financial Analyst from the Asset Management Department at Jesmond Mizzi Financial Advisors Limited. This article does not intend to give investment advice and the contents therein should not be construed as such. The Company is licensed to conduct investment services by the MFSA and is a Member of the Malta Stock Exchange and a member of the Atlas Group. The directors or related parties, including the company, and their clients are likely to have an interest in securities mentioned in this article. Investors should remember that past performance is no guide to future performance and that the value of investments may go down as well as up. For further information contact Jesmond Mizzi Financial Advisors Limited of 67, Level 3, South Street, Valletta, on Tel: 2122 4410, or email [email protected]