The year 2021 turned out to be a rare event, namely a year in which our central scenario for the year panned out, at least in broader terms. The year started with quite strong covid restrictions to curb the spread of the alpha variant of the corona virus. Restrictions led to weaker GDP growth at the start of the year. Vaccine roll-out and a strong belief in reopening among market participants still made for strong and relatively stable markets, however. Economic growth picked up sharply from the spring and continued through the year underpinning market developments. The sailing was not completely smooth as the Delta variant raised concern from early summer onwards but as the vaccines turned out to be efficient against the variant and also because the initial spread of the Delta variant took place through the summer and early fall, Delta did not lead to large deviations from the growth trend and did not impact markets strongly.
The reopening story being the main theme for 2021 made for strong credit markets in the Nordics, particularly for high yield. Investment grade also performed well with an initial spread tightening through February and stable markets thereafter. Also for high yield a substantial part of spread tightening took place in Q1 but as the Nordic high yield market lagged developments in the US and European high yield markets from 2020 we saw a continued spread tightening through most of the year, even in the face of record issuance activity.
Nordic credit markets 2021
Where 2020 stood out as the year with the largest credit spread movements ever seen in the Nordic credit markets, 2021 was marked by a strong and also stable credit market both for investment grade and high yield. Strong belief in vaccines and the underlying reopening scenario protected credit spreads against pandemic headwinds from the Alpha and Delta variants of the virus.
2021: Investment grade - a year of stable credit spreads
Volatility in high yield spreads was also quite low in 2021 but here we saw a continued credit spread tightening throughout most of the year, although spread tightening was strongest in Q1.
High yield spreads in 2021
Source: Bloomberg, DNB Markets Credit Research
2021 was also a very active year in the Nordic high yield market with record issuance. Thus, the growth trend of the Nordic high yield market continues and diversification across sectors and individual issuers improved further.
Issuance in the Nordic High Yield market (2021 up to end-October)
Source: Stamdata, DNB Asset Management (further analysis)
Macroeconomic developments in the Nordics
Economic growth has been strong in the Nordics in 2021. For Sweden the latest estimate from the central bank (November) is 4.5% GDP growth for 2021. For Norway the corresponding figure is 4%. The outlook for growth in 2021 is also strong, around 3.5% for Sweden and 4% for Norway. Consumption growth will be the main driver, particularly for Norway where the estimate is 9.6% consumption growth for 2021. In Norway, the central bank has responded to developments by starting on a series of rate hikes. The first hike of 0.25% happened in September and the second hike is expected by the market and experts in mid December. In general Norges Bank indicates that they plan for 4-5 more rate hikes from December 2021 to December 2022. It is important to note that the rate hikes do not come because the central bank believes inflation will be a problem in Norway for the next few years. Actually, the inflation estimates from Norges Bank shows that they expect inflation to stay below the inflation target of 2% at least until 2025. The rationale for the rate hikes is that the Norwegian economy has come out of crisis mode and as such there is no reason to keep the interest rate at a crisis level – so we are talking about a kind of normalization.
Although the Swedish economy is also quite strong the central bank has no plans for hiking the interest rate for the next couple of years. Sveriges Riksbank now indicates a possibility for first rate hike in the second half of 2024.
Outlook for 2022
Towards the end of 2021 the Omicron variant of the Coronavirus has created increased uncertainty and some market volatility. It is too early to say what effects the Omicron virus will have on economic activity into 2022. We are seeing many countries reintroducing measures to curb social contact and some countries even moving towards full lockdowns in the face of the combined effects of the Delta variant (in winter) and the uncertainty surrounding the Omicron variant. Clearly, Omicron can create some continued volatility into the early part of 2022. But, based on the experience from the Alpha and Delta variants, it is hard to see Omicron really derailing economic developments for 2022. Inflation and potential rate hikes from the Fed could pose a market risk for parts of the year but probably will dominate market developments as long as the main scenario of another strong year for GDP growth materializes.
We are seeing corona measures being introduced in the Nordic countries as well. But in our view these measures are unlikely to impact growth substantially but rather potentially transfer some growth from Q1 to later in the year. Based on this view we have a positive/constructive view for the Nordic credit markets for 2022. This goes for both investment grade and high yield. But the view is stronger for high yield as we still see credit spreads in the Nordic high yield market as attractive relative to high yield spreads in the US and Europe.