Posted inEmerging MarketsNORDICSEquitiesUnited StatesEurope

It’s the economy, stupid, say Finns

Europe’s economic outlook is brightening and consumer confidence is on the up. This should provide a boon to stocks with exposure to the European economy, Finnish investors told our researcher when he visited Helsinki last week.

His visit came as Finland is finally emerging from a prolonged, multi-year recession. The Finnish economy finally caught up with its peers in the rest of Europe in 2016, posting GDP growth of 1.4%. The strong performance of export industries and rising consumer confidence even prompted Nordea, the Nordic bank, to double its 2018 GDP growth forecast for Finland to 1.5% yesterday.

Bears turn into bulls

This rosy economic backdrop translates in an overwhelmingly positive macroeconomic outlook: two thirds of interviewees are upbeat about economic prospects. This is a huge change from a year ago, when economy bears vastly outnumbered bulls in Finland.  

A positive outlook on the economy usually translates into appetite for equities, and it’s no different this time around. And seldom has the choice between US and European equities been as easy as now, Finland’s fund buyers contend. European stocks are significantly cheaper than their US counterparts, and interviewees agreed almost unanimously the former are to be preferred.

Half of interviewees plan to increase their exposure to European equities over the next 12 months, while many are already overweight. Finnish investors believe the political risk premium on the asset class is currently too high, a feeling that has been reinforced by the resounding victory of pro-European parties in the recent Dutch elections. There was pretty much a consensus among interviewees that economics, not politics will drive markets in 2017.

US equities – all risks to the downside

US equities, on the other hand, are a whole different story. Until Donald Trump’s election, Finnish investors had been in a wait-and-see mode versus the asset class, which was already considered expensive. During the Trump rally, which came to a halt last week when investors started to understand the Donald is not quite the dealmaker they were hoping for, valuations had only been rising further.

As a consequence, half of interviewees now plan to cut back their allocation to US equities. They believe US equities can only head in one direction, and that’s not up. As one investor put it: all positive aspects of Trump’s agenda are now discounted for in asset prices, while there is little room for disappointment. Interviews were held just before Trump’s Obamacare debacle, and the market’s response to that showed the he had a point.

EM equities: back in favour

Emerging market equities are a long-standing favourite of Finnish investors, and this time it’s not different. Almost half of interviewees plan to increase their allocation the asset class over the next 12 months while none plan to decrease their exposure.

EM equities were sold off after Trump’s election victory on fears he may introduce protectionist policies. However, Trump’s apparent inability to strike political deals, as demonstrated by his failure to reform Obamacare, could be good news for EM equities: it reduces the chance Trump will find sufficient support in Congress to erect lasting tariff barriers to fight ‘unfair’ competition from manufacturing companies based in low-wage emerging market economies.

Just like in most of the rest of Europe, the Finns have a preference to invest in emerging markets through global funds, but Asia ex-Japan is also reasonably popular.

Part of the Bonhill Group.