Nordic small caps spell big opportunities

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Nordic small capitalisation (small cap) stocks listed on the stock exchanges in Sweden, Norway, Finland and Denmark have provided strong returns over recent decades and yet remain highly under-researched. In a recent white paper, we explain the solid investment potential offered by Nordic small cap stocks and why we believe active management is important in getting the most from the inefficiencies inherent in this market.


Nordic equities: long-term outperformance

Nordic equity markets as a whole outperformed US, European and global equity markets over the period 1965-2014 (see exhibit 1 below).

Exhibit 1: Annualised real returns of a selection of regions for the period from 1965-2014


With rich natural resources, healthy macroeconomics and a strong innovative culture, Nordic countries provide a favourable environment for growth and stock market returns. The long-term outperformance of Nordic equities can be explained by the region’s political stability and solid macroeconomic financials, paired with diverse natural resources and small domestic markets. These factors have forced Nordic companies to go global and become very competitive.

There is wide independent endorsement of the region’s attractions. Denmark is the world’s least corrupt country and ranks fourth in the world for “Ease of Doing Business”. Finland has the world’s best education system according to the OECD and was judged to be the “Best country in the World” by America’s Newsweek magazine. Sweden is the “world’s most innovative” country and has the third-lowest infant mortality rate in the world. Norway ranks third in the world in terms of GDP per capita and is ranked best in the world on the UN Human Development Index.

The main attractions of investing in Nordic small caps

One of the key attractions of investing in small cap companies is the greater potential as businesses evolve from the start-up and growth phases to the mature phase of the business cycle. It is easier to grow from EUR 100 million in sales revenue than from EUR 50 billion. Investing in this asset class can capture the returns from the early stages of new industries as they develop and benefit from the entrepreneurial type of management inherent in smaller companies (see exhibit 2 below).

Exhibit 2: Tradition business cycle of a company

business cycle

The Nordic region has provided a long list of such global growth stories – in industry and consumer sectors (see exhibit 3 below), such as IKEA, Tetrapak, Electrolux, H&M, Volvo, Novo Nordisk, Statoil; and in technology – Spotify, Skype, King (Candy Crush Saga), Rovio (Angry Birds), Mojang (Minecraft), Ericsson and Nokia. We see no reason for similar successes not to follow in the foreseeable future.

Exhibit 3: Sector weights Carnegie Nordic Small Cap Index


The strong performance history of Nordic small caps

Financial theory asserts that small cap stocks in developed markets should offer greater long-term performance than large-cap stocks at the expense of greater volatility. To verify this, Alfred Berg ran a performance analysis using the Russell 2000 and S&P 500 indices representing US small and large cap equities. To depict European small and large caps we used MSCI Europe Small Cap and MSCI Europe (see exhibit 4 below). We also plotted the Carnegie Nordic Small Cap Index and VINX 30 (representing Nordic Large Caps) in our analysis. The result showed that small cap companies have significantly outperformed their large cap counterparts in terms of annualised returns with only moderately higher volatility over the last 15 years. The conclusion is that the small cap stocks delivered the strongest risk-adjusted performance.

Exhibit 4: 15 year annualised returns vs 15 year annualised standard deviation


Nordic small cap stocks do well coming out of recessions

In addition to the risk and return potential Nordic small cap stocks offer, they have also historically performed better than large cap stocks when coming out of market downturns. For example, Nordic small caps recovered from the bursting of the technology bubble by returning 28% in 2004 vs. 11% for large cap stocks (see exhibit 5 below). Nordic small cap stocks also recovered more quickly from the recent financial crisis, returning 68% in 2009 vs. 33% for large cap stocks.

Exhibit 5: Nordic large cap (blue line) compared to Nordic small cap returns (green line) for the period from 2001 through June 2015.


Small cap companies are generally more nimble and able to modify their strategies and reposition products quicker than larger corporations. As a result, they can quickly add to their work force and increase production when economic activity begins to improve.

Nordic small caps have historically shown strong earnings growth

Small caps have strongly outperformed large caps and global indices in the past few decades both in absolute return and risk-adjusted terms. This trend has been driven by greater growth prospects for smaller companies. Their inherently flexible and entrepreneurial structures are often well-suited to capture market opportunities and adapt to changing trends. This is reflected in higher sales and earnings growth (see exhibit 6 below).

Exhibit 6: 5 year average trailing Earnings per Share (EPS) growth


It is our view that investment in the Nordic small caps economies has the potential to generate above-average secular returns based on its long-term historical performance and current fundamentals.

Additionally, the increasing amount of cash reserves held by large caps combined with significant signs of uplift in global M&A activities could benefit the performance of small cap and mid cap stocks in the coming period. Our analysis suggests that the highest potential investment return may be found by looking to capture the companies that will have the potential develop to become the next ‘top 20’ companies five to 10 years from now.

Small cap investing requires active management

The Nordic small cap market is under-researched. The most common Benchmark index (Carnegie Nordic Small Cap Index) constitutes some 575 companies, of which around half are covered by one or no equity research analyst (see exhibit 7 below).

Exhibit 7: Average analyst coverage per stock by market capitalisation


This lack of research can lead to significant inefficiencies and mispricing in this part of the equity market that can be exploited through a combination of solid proprietary company research and active portfolio management.

To obtain a full version of the white paper on which this article is based please contact  Baptiste Keller :

Johan Stein

Senior Portfolio Manager at Alfred Berg

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