Carnegie Investment Bank AB is based in Nordic countries, with offices in London and New York as well. Their equity research for Autumn 2012 details what factors will drive economies in these countries in the upcoming quarters. The report is mostly bullish on the whole Nordic economy, except for some sectors that it believes will plunge into negative returns in the coming months.
The strategy report starts off with positive tidings of a 12 percent YTD gain in Nordic equities. The key drivers have been hope of ECB measures, bailout funds, and recapitalization of Spanish banks. The earnings season fell below expectations, as the strengthening Swedish krona affected some Materials sector companies negatively. The strongest performer in the Nordic region (according to Carnegie expectations) was the the Financial sector.
Carnegie’s research cites a number of factors that will drive the dividend yield above 15 percent. The increase will come from growth in China, US recovery, ECB buying government bonds, cash inflow from bonds to equities, and reduced risk premium.
ValueWalk's Raul Panganiban with Maurits Pot, Founder and CEO of Dawn Global. Before this he was Partner at Kingsway Capital, a frontier market specialist with over 2 billion AUM. In the interview, we discuss his approach to investing and why investors should look into frontier and emerging markets. Q2 2021 hedge fund letters, conferences and Read More
Growth in the US will be mainly driven by recovery in the housing market, while the risk to the economy comes from the uncertain political scene. Growth in China is expected, mainly because Carnegie thinks that the economy is past its low point and China has taken positive measures like reduction in interest rates, increases in lending, and tax cuts.
As bond yields are very low in ‘safe’ countries, like those in the Nordic region, investment will be directed towards equities, and this will help in reaching the expected dividend yields. The research sees some hurdles in the way of ECB’s acquisition of short dated government bonds. The decision on the legal standing of bailout funds, EFSF/ESM, which is pending in the German court is also awaited. The stimulant will come when Spain or Italy request EFSF/ESM to buy its bonds, after which an agreement will be signed and the process will be set in motion.
Sector wise Strategy
The report has a positive view on Capital Goods for 2013 (an underperforming sector of 2012). In the automobile sector, Carnegie favors Volvo (Stockholm: VOLV-A), Trelleborg (Stockholm: TREL-B), Skanska, and Konecranes, and advises to steer clear of Alfa Level and Vestas. Boosts in the oil and energy sector is also expected which will be strongly driven by high international oil prices and new oil findings in Norwegian Continental Shelf (NCS).
The report favors BW Offshore, DETNOR and Lundin Petroleum, but comments on the political gloom that surrounds the oil market and how oil production is high but demand is not as strong due to high prices and slow economy.
In the telecom sector, Carnegie is bullish on Sony Ericsson (NASDAQ:ERIC) and TeliaSonera AB (STO:TLSN) (due to expectation of 10 percent dividend yield), but is not hopeful about Nokia Corporation (NYSE:NOK).
After an 8% increase in the Consumer Discretionary & Staples and 13 percent in Financials since the last report, Carnegie is now neutral on both sectors. Still an increase in earnings of 150 percent is expected in the Norwegian Marine Harvest. Other movers are Nokian Tyres and Schibsted. In the banking sector, Carnegie movers are Nordea, while in insurance it’s Tryg. The analysis expects limited growth in real estate in the Nordic region, but likes Fabege. The research maintains its neutral position on both the transportation and software sectors. In transportation Carnegie likes AP Møller-Maersk and Wilhelmsen ASA, while in software it favors Atea and Tieto.
The analysis has a negative view of the Healthcare, Commercial Services and Materials sectors. In healthcare, Meda and Novo Nordisk are favored, in comparison with AstraZeneca plc (LON:AZN) (NYSE:AZN). The materials sector is negatively driven by drought in the US, high ethanol prices, and excessively high valuation of companies like SCA and Novozymes A/S (CPH:NZYM-B) (PINK:NVZMY). Carnegie likes Novozymes and Biden, and dislikes UPM-Kymmene and Stora Enso in this sector.
Carnegie does not expect huge sales or earning in Nordic equities in the coming quarters, due to a stronger SEK and modest growth potential. In 2013, the increase in sales is expected to be only 4 percent, while earnings are expected to increase by 16 percent according to the analysis.