Investing in Scandinavia, where the winner doesn’t take it all
Free education, high pay, excellent healthcare, generous pensions – but a great business environment and booming stockmarket too. Jonathan Compton is heading to Scandinavia.
Free education, high pay, excellent healthcare, generous pensions but a great business environment and booming stockmarket too. Jonathan Compton is heading to Scandinavia
It was "Obamacare" that finally did it for me. Barack Obama's efforts to broaden healthcare coverage among US citizens was passed in 2010, and it remains a hot political issue. During the visceral, early debates, one regular insult hurled at its supporters not just by the always-hysterical Fox News was that "this bill will make America like Scandinavia". As a regular visitor to Scandinavia, I decided to look into whether this slur was justified. My conclusion was clear: American or British, young or old, rich or poor or an investor you are better off being Scandinavian.
Scandinavia is normally defined as comprising Norway, Sweden and Denmark (hence the Nordic States) but, for historical and cultural reasons, we should include Finland and Iceland. Its total population is 27 million, with income per head higher than in the UK, with its population of almost 66 million. Only the two largest countries Sweden (population ten million) and Denmark (six million) have been nations for long. Norway only became independent in 1905; Finland in 1917; and Iceland in 1944.
Historically, they weren't especially nice places: from the 8th to the 18th centuries there was much high-testosterone aggression between various tribes, who created significant European empires along the way. Liberal, peaceful Scandinavia is very much a 20th-century creation.
So what's so great about it? From cradle to grave you are better off both materially and in "soft" areas. In infancy, survival odds are impressive in the US and the UK, there are 5.9 and 4.4 deaths respectively per 1,000 live births (up to five years' old). In Finland the rate is 2.3, with Denmark "worst" at 3.5. And in terms of general health, Scandinavia is a clear leader. It is normal to be able to call a doctor and obtain an appointment on the same day or if you are too ill he will come to you. "The NHS is the envy of the world" is a regular British political boast. Not so in Scandinavia.
Then there is education. In the leading Danish and Finnish models, pupils start primary school at seven years old. There are no entrance exams, uniforms, league tables or overarching ideologues such as the UK's education regulator Ofsted, and a maximum of 30 minutes' homework per day until around 13.
Meanwhile, almost all higher education is free. In the US and the UK (except Scotland), government policy has long been one of steadily raising the amount students must pay, leaving graduates mired in debt. The results speak for themselves on every major international measure the Scandinavian system produces better-educated students than the UK and the US across most disciplines.
Being an adult in Scandinavia is better too. At the bottom end of the scale, in the UK and the US, the prison population per 100,000 adults is 148 and over 700 respectively. In Scandinavia the average is 64. More importantly, the rate of recidivism reoffending and returning to jail is less than half the UK/US level. Low population densities in Scandinavia are often cited as an advantage here. But prison rates are also far better than in under-populated areas in the UK and US.
If you're not in jail, then your income will be significantly better than the UK average. In terms of GDP per head globally, the UK ranks 25th; the Scandinavians, except Finland, between sixthand 20th. Minimum wages are between one and two-thirds higher the result of strong but co-operative unions. Female equality in the workplace is high too: the average local company board is around 25% female, versus 14% across the European Union, while the debate on women priests ended successfully in Scandinavia before even becoming an issue elsewhere.
In terms of working hours, virtually no Scandinavian works more than 40 hours a week from nine to five; they never work late on a Friday; and work at weekends is very rare. Lazy? No productivity is good and they are actually working.
Scandinavia is not immune to the problems of deteriorating demographics the birth rate is falling and the population ageing as life expectancy improves. Yet for retirees or the infirm, Scandinavia is the place to be, as the benefits and care are superior. Each country has a public and private healthcare system (the latter usually larger than that of the UK) and healthcare costs per head are 10%20% higher.
However, repeated studies show that the effective level of care and "bang for buck" is much better, even allowing for higher funding; and while life expectancy is only a couple of years better than the EU/US averages, ethnic minority groups and the poor fare much better in the US, or say Glasgow, the numbers remain depressingly bad.
As for healthcare, so too pensions. A report by Mercer showed Denmark has not only the most generous level of pension in the world (followed by the Dutch) but that Scandinavian state pensions are 50% to 150% higher than in the UK. Moreover the underlying funding is sounder. The UK continues to rely on hand-to-mouth fictions such as national insurance.
and the cons?
Given that Scandinavia seems to be a 21st-century Valhalla, what's the catch? GDP growth? No. This has been much higher than growth in the EU and about the same as in the UK. House prices? Yes, these have gone ballistic, but the central banks have already tightened controls. As for government finances and the banking systems, not only did they weather the global crash well (except in Iceland), but the capital and lending criteria for the banks were not allowed to deteriorate like the rest of Europe and the US. (This was largely because the governments had learned from the area-wide bank meltdown of 1991-93.)
There are problems of course. In Norway, high gun ownership means that the risk of being shot is worse than in many developed countries. "Liberal" Sweden continued to compulsorily sterilise "undesirables" until 1976. More recently, overzealous officials have been removing children from their families on very dubious grounds. Alcohol taxes are absurdly high, and as a result, roughly a quarter of all households make or buy illegal hooch (hence significant alcohol poisoning). As for most of Europe, high immigration is a major pressure point; nationalist parties with barely concealed undertones of racial purity are gaining support from left- and right-wing voters. This has rarely proved to be an economic winner.
However, the most obvious significant catch from a purely economic point of view is higher taxation. Detailed comparisons are difficult, but in the UK, income tax rates are broadly 20% to 45% (although national insurance can take it to above 50%) and in the US, federal, state and local taxes combined give a range from 4% to 40%. In Sweden, it is around 31% to 60%, Norway 0% to 47% and Denmark 29% to 52%. Does anyone want higher taxation? Politicians in the UK and the US assume the answer is an unequivocal "no" (even as taxation overall creeps ever-higher).
Yet perhaps this assumes too much. Britons and Americans have zero experience of excellent free care for children, the old or the ill; free quality education; the compensation of higher pay; excellent healthcare; long holidays; great pensions; and better infrastructure. If these were delivered here in the UK rather than the usual litany of failed promises who knows how many would happily opt for a similar model?
I mentioned "soft" factors. Scandinavia always scores highly in global happiness indices but these feel a bit squishy. However, the Gini coefficient which measures income inequality is far more robust, and in my view the killer punch. A Gini score of zero equals perfect equality (or misery/communism, essentially the same thing) while a score of one reflects total inequality.
The Scandinavians score 0.26, making them the most equal in western Europe; the UK at 0.34 is the worst (the US is on 0.38; most countries over 0.45 are nasty dictatorships or corrupt developing nations). Gini data can also be used to measure wealth inequality by bands. I won't go into the details, but Scandinavia scores healthily as a capitalist area the top 20% earns between 3.8 and 4.5 times the bottom 20%. The UK and the US are at extremes of 7.2 and 8.4 times respectively.
Robust capitalists against inequality
Does such a disparity matter? I am a robust capitalist much in favour of lots of money. But it is clear that when wealth inequality becomes too extreme, social and political evils appear. I find it bizarre that in the UK, after a century of all governments legislating for a more just society, the share of total wealth owned by the top 20% in 1910 during the reign of King Edward VII was more than 90%; yet in 2011, during his great granddaughter's reign, it was still a whoppingly disproportionate 63%. Scandinavians are strongly pro-wealth think Wallenberg, Tetra Pak and other family empires but have deliberately reduced inequality for a measurably better, more productivesociety.
Other Europeans and Americans seem to view Scandinavians as gloomy, humourless and "politically correct", perhaps as a result of the many successful "Scandi-noir" TV programmes, films, and books on crime and politics, with their tough-but-stressed women and angst-ridden alcoholic men. My hunch is that this genre dominates because serious crime and political crises are so rare as to fascinate local viewers.
As regards excessive PC, look no further than the popular Finnish sport of eukonkanto. Chunky men race over an obstacle course carrying often-bulkier women. Prizes are awarded on a ratio of speed and heftiness in beer. Such events would be condemned in ever-primmer America and the UK. So what does this mean for investors? Well, it turns out that it's not just about lifestyle equity markets have been doing better in Scandinavia too. I look at ways to invest below.
The best ways to invest
Over the last five years and indeed since 2000, stockmarket returns (measured by the Nordic 30 and local OMX indices) have beaten most of their leading global peers, including the FTSE All Share and the Eurofirst 300. As the Nordic countries lack a large domestic market, companies have had to be adept at exporting and competing overseas. High levels of equality mean that executive pay is relatively modest, as are bonus and options packages.
Corporate governance and transparency has been high (notwithstanding a recent corporate jet scandal at Industrivarden, a large holding company). Gearing excluding Volvo and tobacco group Swedish Match is low at around 50%, with net debt to EBITDA (a key criteria for lenders) a modest 1.3 times. Yet the Nordic 30, on a 16.4 forward earnings multiple and a yield of 4.1%, is still cheaper than both the UK and US markets.
The simplest route is to invest via the db x-trackers MSCI Nordic Index UCITS ETF (LSE: XDN0) available to UK sterling investors, or the dollar-denominated Global X FTSE Nordic Region ETF (NYSE: GXF). Those looking for active funds could consider the Nordea Nordic Equity Fund BC (LU0841548497) which has performed steadily and holds a range of good industrial and cyclical stocks across the Nordic region. Racier and more interesting is the SEB Nordic Small Cap Fund C (CLU0385664312).
For direct investors, I'll suggest a company that I have long owned, despite its dog-like performance over the last 12 months giant Norwegian fertiliser global company Yara (Oslo: YAR). The weakness has been down to lower grain prices; this tends to hit Yara's profits and therefore its share price. Yet on a multiple of less than eight, and a yield of more than 5% the valuation is simply too low, given the strong balance sheet.
Next is Sweden's AB Kinnevik (Stockholm: KINVB). This holding company has a good track record of developing then selling off businesses. Currently its main interests include ecommerce, via fast-growing European online shopping leader Zalando; mobile telecoms through the US-listed Millicom (which has significant operations in Latin America and Africa); and the Swedish-listed Tele2 which operates mobile and broadband across eastern Europe and parts of Asia.
The share price tends to trade like an investment trust on a discount or premium to assets. I estimate that the current discount is now more than 20%, the lowest in three years (that is, you can buy £1 of assets for less than 80p). The yield is nearly 4%.
Svenska Handelsbanken (Stockholm: SHBA) has been slightly tainted because it was a major shareholder in Industrivarden, which is now being broken up following the scandal. It has rightly developed a reputation for being both arrogant and very conservative perhaps a legacy of when it was in deep trouble during the 1993 banking crash.
With a price-to-book ratio well below its peer group average, and a yield of over 5%, I would be a happy buyer. Last is Swedbank AB (Stockholm: SWEDA). This is essentially a dull savings bank, but it has a good reach across Scandinavia, and a strong position in the fast-growing Baltic states. Growth in earnings per share has averaged 17% a year for five years, and the dividend has risen progressively. The current yield is 5.4%.