The COVID-19 outbreak is reducing global economic activity, weighing down the financial markets and heightening uncertainty. Drastic quarantine measures and partially closed borders are causing disruptions of historic proportions in global production chains. Fortunately, the Nordic business sector is well equipped to manage external disruptions and is at the forefront of new technology.

Before 2020, the number of Nordic initial public offerings (IPOs) had been at a historically high level. There is much to indicate that this will continue when stability returns to financial markets. Carnegie has taken the lead in the Nordics when it comes to using anchor investors, who commit to acquiring an agreed portion of the available shares. As a result, IPOs can still be executed when the listing climate is somewhat less favourable. Anchor investors raise transaction certainty and ensure high transaction quality. Further, good equilibrium prices are often achieved, giving an upside to new investors.

Access to risk-willing capital also remains good in light of low interest rates. This is particularly apparent in the demand for alternative investments in unlisted companies among Carnegie Private Banking clients. At this stage, companies often announce that they are planning an IPO within a few years and are thus in the pre-IPO stage. Investments in companies prior to buyouts or IPOs are often good investments.

The changing winds of public opinion and political tendency towards protectionism have restrained globalisation

The transformation of Nordic economies prompted by growing technology and biotech sectors has continued, and interest among companies seeking financing or an IPO was good at the beginning of the year. This reflects the dynamics of a business sector increasingly dominated by new entrepreneurs, business models and technologies. Tech and biotech are two areas showing growth in mergers and acquisitions at the European level. As digitalisation and automation continue to recast the business sector with unabated strength, climate issues and new technologies that address climate transition are climbing even higher up the agenda. Further, the issue will quickly take on greater urgency after the acute phase of the pandemic has passed.

 

A world divided
Globalisation – in combination with digitalisation – has been a dominant driver among economies and financial markets around the world for decades, especially since China and the former Soviet countries of Eastern Europe began to integrate into the world economy in the late 1980s.

However, the changing winds of public opinion and political tendency towards protectionism have restrained this trend. This is most obvious in terms of Brexit and the US’ ambitions under the Trump administration to move towards more bilateral, rather than multilateral, trade agreements. The trade war between the US and China, in particular, could lead to some regionalisation of the world economy, with the US and China becoming the focal points of two distinct blocs.

It now appears that the outbreak of SARS-CoV-2 will accentuate geopolitical tensions and trade conflicts. We are seeing signs of a technological cold war (a ‘decoupling’) in which the world is technologically divided into two spheres – American and Chinese. With this development, Chinese tech companies are becoming more of a risk factor for European industry, and national domicile is playing an increasingly important role for a growing number of companies.

When economic instruments are used to pursue geopolitical ends, globalisation is challenged as a megatrend and a dominant force in the world economy. Instead, signs of deglobalisation – during which global economic integration is at least partially reversed, moves backwards and loses steam overall – are emerging. The re-evaluation of trade relationships – not only between the US and China but, by extension, between other regions – is decelerating international trade and dampening economic growth.

 

Ongoing uncertainty
The upcoming US presidential election and the ongoing issue of Brexit are generating some political uncertainty in 2020, with the former likely to be a factor in the financial markets during the second half of the year. The answers to investors’ questions about what economic rules will apply between the EU and the UK will not come until late in the year, and several matters are likely to be postponed.

The Nordic equity markets have substantial exposure to global trends and risks, although the region’s economies are stable and public finances are robust. Nordic business sectors are also generally good at managing external disruptions, structural changes, new technologies and novel business models, which are creating investment opportunities in the region and have historically contributed to a vibrant corporate transaction market. Climate risks, sustainability and environmental, social and governance factors are also rapidly and steadily climbing up the priority list for companies and investors alike. Effective corporate strategy and implementation in these matters often leads to premium valuations of companies, as shown by Carnegie’s analysts. Nordic companies and stock exchanges are relatively far ahead of the pack here, and an assessment of the risks to a company from climate change is the latest example.

The European Commission’s Green Deal, which has a sharper focus on reducing greenhouse gas emissions, will create major opportunities for Nordic companies that are well-positioned with new technology and comprehensive sustainability programmes once the COVID-19 pandemic subsides and economic recovery arrives. Sudden economic and political changes that affect stock market sentiment put higher demands on portfolio management. Investors should, therefore, make sure their allocation is right. It is imperative to have access to proactive, committed and high-quality advisory and management.

In late January, we lowered the equity weight to ‘neutral’ in light of favourable stock market trends, high valuations and the growing uncertainty about the spread of the novel coronavirus – the capital freed up was invested in fixed-income assets. In March, our equity exposure was markedly reduced due to the stock market decline. We then chose to rebalance our portfolios by again increasing the equity weight at the expense of fixed-income investments. In hindsight, that was a wise decision: as a result of the upweighting, combined with a rising stock market in April, our equity exposure was once again rather large. We decided, therefore, to rebalance again in May by taking some of the profits from the market recovery and maintaining a neutral equity weight.

At present, we recommend a neutral allocation between Swedish and foreign equities. Foreign equities have performed somewhat better during the year when measured in SEK, mainly due to the strong development of US tech companies. Few clues indicate that either Swedish or foreign equities will have a clear advantage during the rest of the year: Carnegie Securities has cut its profit forecast for the large-cap universe in Sweden by more than 25 percent for 2020, but the consensus is that this loss will be regained in 2021. This is probably an optimistic assessment, as COVID-19 is both weakening demand and increasing costs.

When profit outlooks are this uncertain, equity valuation becomes very difficult. Looking at price-to-earnings ratios over the next 12 months, global equities are expensive, but interest rate support has been strengthened during the pandemic. The US Federal Reserve is going the furthest in this regard and is now buying corporate bonds.

 

Trends for the future
Following the credit market crash and the robust measures taken by central banks, we identified a seldom-seen buy opportunity in fixed-income investments. The investment-grade segment (bonds with high credit ratings) is the most interesting, but there are also selectively interesting opportunities in high-yield bonds (those with lower credit ratings).

It is important to note that we work globally on the fixed income side and, this year in particular, our decision to diversify away from the Nordic region has paid off. Liquidity on the fixed income side is poorer in the Nordic market and more concentrated in certain sectors, which is rarely a good thing in times of crisis. Our alternative investments have done better than our fixed-income ones this year and have not been as severely impacted by the coronavirus crisis. As such, we see a somewhat greater upside potential in fixed-income investments in the next few months.

In another distinct trend, an increasing share of corporate loan financing is ending up outside the traditional banking system, as banks must limit their lending. Corporate financing is instead being arranged through bonds or direct loans from providers outside the banking system, such as institutions and special funds. This may bring additional return opportunities for private banking clients. This trend is creating scope for private individuals and institutions to invest in debt instruments with relatively good returns, which are otherwise hard to find.

As before, the view remains that the best returns are found in the stock market. In our management, we are constantly looking for interesting thematic investments and associated investment products. Sustainable food, 5G, ‘antifragile’ assets, robotification and the pharmaceuticals of the future are examples of our current thematic investments. Tech is red hot and 5G is kicking the digital economy into next gear. Self-driving cars, the Internet of Things and e-health demand faster connections, shorter response times and better coverage.

These drivers are accelerating the transition of the agriculture and food sectors towards a greener, more sustainable future. This is creating exciting investment opportunities in areas including health food, agritech, animal and plant welfare, recycling and green packaging. Assets that are resilient to or strengthen during moments of turbulence are a desirable addition to a portfolio. The antifragile assets we are finding include certain government bonds, commodities, volatility products and currency positions, as well as certain equities.