Last Updated on 21 November, 2023 by Samuelsson
The Nordic/Scandinavian region gets lots of coverage for its welfare models and statistical happiness. However, perhaps lesser known is that its stock markets have performed well over the last 50 years. We believe there are at least 7 reasons to invest in the Nordic stock markets:
This article explains why you should invest in Nordic/Scandinavian stocks: We give you 7 reasons to invest in the Nordic stock markets: The region has performed better than US stocks, The Nordic region has a large small-cap universe, many global brands, a good business climate, it’s easy to do business, is not as socialistic as many believe, and you get diversification benefits by investing in the Nordics.
The US stock market attracts most of the attention, deservedly so, because it’s home to 50% of the world’s stock market capitalization. But the Nordic region has managed higher annual returns over the last 50 years, according to Dimson, Marsh, and Staunton, the authors behind Triumpf of the Optimists.
Which countries are in the Nordic region?
We define the Nordics as Norway, Sweden, Denmark, Finland, and Iceland (Scandinavia is Norway, Sweden, and Denmark). The languages are related and quite similar, and Norwegians, Swedes, and Danes can easily understand each other. The exceptions are Iceland and Finland with each separate language.
In this brief article we give some brief reasons for why the Nordic companies have generated high returns, and why it’s likely to continue to do so:
Reason number 1: High returns since 1965:
Source: Dimson, Marsh, and Staunton (The authors of Triumph Of The Optimists). Real returns.
The region has outperformed the US markets since 1965, which is perhaps a bit surprising (?).
Reason number 2: Many interesting small caps (which have outperformed)
Our rough calculations indicate there are almost 1 000 listed/OTC companies in the region.
Furthermore, the small caps have outperformed both global and US small caps for a long time: MSCI Nordic small caps have returned 11.9% since 2000:
|MSCI Nordic||MSCI Nordic||MSCI World|
|3 Yr CAGR||5 Yr CAGR||10 Yr CAGR||CAGR since Dec. 2000|
The results are confirmed according to a study by Alfred Berg called The Case For Nordic Small-Cap Equities. Carnegie Nordic Small Cap Index has performed well:
|Return 2002-14||Std. Deviation|
|MSCI Europe small||10%||18%|
Sweden has the most interesting small caps, in our opinion, and more of them than its neighbors.
Reason number 3: The Nordic region has many global brands
Being such a tiny region with just 28 million people, it has a huge number of solid worldwide brands:
Volvo, H&M, Novo Nordisk, Spotify, Skype, Electrolux, Evolution Gaming, Alfa-Laval, Jotun (paint), IKEA, Equinor, Maersk, ABB, Assa Abloy, Autoliv, Atlas Copco, etc.
However, the industrial structure varies in each country. For example, Norway has a more concentrated sector in oil/gas, fish, shipping, and some commodities, while Sweden and Denmark have a much more diversified industrial base.
Why does the region have so many global brands?
Due to the small size and population, most companies are “forced” to expand internationally. In order to compete in the world markets, the local economy has lots of incentives to stay competitive.
Exports and foreign trade are paramount: Sweden exports 43% of its GDP, Norway 37%, and Denmark 55%. For comparison, the US only exports 11% and UK 32% (source: CIA’s World Factbook). The adverse effects are, of course, vulnerability to global business cycle fluctuations and the world economy.
The Covid-19 crisis most likely leads to some sort of de-globalization, in which small and open countries might face some headwinds compared to more prominent countries.
For example, can the US more or less be self-sufficient in practically everything, this of course is much more difficult for smaller nations.
Reason number 4: The Nordic region has a business mindset
Culture and mindset are perhaps the most important factor for generating wealth. Since the first humans settled in the Nordic region, life has been hard. This, coupled with an ascetic and protestant culture, has led to a long-term mindset where hard work is a virtue.
In former times you had to prepare in advance to survive the following winter(s). This mentality still exists, but the welfare state has changed this behavior. The welfare state is dependent on trust, and this is something the region has a lot of.
Lawrie Cunningham explains well how Warren Buffett made his business empire based on trust. Likewise, the same mentality is flush in the Nordic region. Where there is trust, it’s easy to do business.
The Norwegian Sovereign Wealth Fund (SWF) is an example of a long-term mindset. Since its inception, about 3 300 billion NOK have been invested, while as of today, its value is about 10 000 billion NOK (about 200 000 USD per capita). The fund is set up so future generations can reap the returns while the capital stays intact.
Compared to most oil-exporting nations, we would say Norway has been highly successful (so far, at least), and this is not due to luck.
Reason number 5: Culture defines the politics
Trust is the foundation of society. Without a basic level of trust regarding the intentions and expected behavior of other human beings, our modern civilization would very quickly disintegrate into total chaos.
— The Rational Walk, October 31, 2019
The Nordic countries are at the top of economic competitiveness, social health, and happiness.
As Scandinavians, we believe cultural reasons are the reasons for this, not political ones. The culture defines politics, not the other way around. You can’t just “export” this model to other countries and cultures.
In general, Nordic people are honest and trustworthy, care for each other, are organized, and pull together if need to, there is a rule of law, property rights are respected, low crime rates, minor corruption, a long-term mindset, and a protestant work ethic.
Charlie Munger and Warren Buffett often talk about the advantages of having an organization based on mutual trust. When you have trust you go on with your business and don’t waste time on formal contracts and other types of friction. It’s the same for a bigger “organization” like a country, and we are confident that the Nordic region has the highest “internal trust” on the planet. .
Practically the whole population agrees on the leading social issues in all countries. Additionally, the Jante law is working as an informal code of conduct.
It’s a relatively business-friendly region where productivity, the most important factor in creating wealth, is ranked among the top.
Capital is taxed at a lower rate than salaries, which of course, leads to the accumulation of capital.
Furthermore, company tax rates are pretty low (in Norway, 22% and no taxes on dividends and capital gains inside the EU/EEA), and the ease of doing business is relatively high, despite the state’s share of the GDP at around 55%.
In 2017 Norway introduced a new optional tax regime for private investors where capital gains and dividends are deferred as long as it’s reinvested (unlimited amounts). Sweden has had this option for some time already.
However, to our knowledge, Sweden was ranked as having the fourth-highest GDP per capita in 1970, while they have slipped on the rankings over the years.
What the future holds is unknown, but all Nordic countries face the same problems as most of the Western world: a growing elderly population, low birth rates, and a steady increase in the number of people depending on the fewer tax-paying workers (relatively).
Is the welfare model sustainable? More and more people live wholly or partially on welfare; in Norway, this is about 14% of the working population (among those who either could work or be self-employed). This number has steadily increased for decades.
Furthermore, the growth in pensioners starts rising rapidly from about 2025. Currently, the Norwegian deficit is huge, around 19%, which is being covered by the SWF. Around 225 000 people are directly or indirectly employed in the oil sector, which is 4.5% of the population.
Needless to say, with the low oil prices, Norway gets a real punch in the face and in April 2020, recorded the highest recorded number of unemployed since 1933.
So far, the low birth rates have been more than offset by immigration, and all countries have had a steady growth in the population for decades.
Reason number 7: Limit exposure and risk – diversification
Why is diversification important in trading and investing? Warren Buffett talks about “diworsification”, but he is a unique investor. Most of us are not, and we certainly don’t have the time to focus on picking stocks as a full-time job. We either have to pick money managers or passive funds. We want to have broad exposure.
The benefits of owning international stocks are empirically documented. Most investors have a home bias, but the US is “only” about 50% of the world’s market capitalization, which means there are many opportunities elsewhere.
Empirical evidence suggests investors can get better returns and less risk in the form of volatility by diversifying (volatility is the normal risk measure, but of course, the real risk is lack of returns).
Many retail investors panic and sell when they see their holdings drop, and hence it makes sense to ask yourself how well you can handle volatility. Most investors forget their long-term goals in times of stress, resulting in bad decisions.
The case for international diversification is better the smaller your home market is. We can argue you get a lot of diversification because US companies derive a lot of their income from abroad (among S&P 500, 43% is international). Still, local multinational companies offer fewer possibilities for diversifying risks than international stocks, according to the Central Bank of Norway (in Norwegian), the manager of the world’s biggest sovereign fund.
Perhaps we are biased because we are Scandinavians, but we believe the Nordic region is a great place to park your assets to generate wealth and diversification.
If you want to read more, we suggest you look at these two links:
Disclosure: I am not a financial advisor. Please do your own due diligence and investment research or consult a financial professional. All articles are my opinion – they are not suggestions to buy or sell any securities.
Related reading: Why I’m Long Gjensidige – The Norwegian Insurer (Analysis)