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The Nordic countries offer a unique investment landscape that combines diversity with stability. Norway and Sweden form the core, followed by Denmark, Finland and Iceland. Overall, these countries are characterised by high economic growth, robust per capita gross domestic product and political stability. Over the last 30 years, the Nordic countries have performed better than the rest of Europe in terms of GDP growth, but also better than the USA and Asia. At the same time, they have been more resistant to crises. In addition, there is an established governance structure in the companies.
This mix is ideal for listed companies to perform positively. Investors could and can benefit from this. It is no coincidence that the Nordic region has achieved impressive equity returns over the years. For example, the MSCI Nordic has significantly outperformed the MSCI World and the MSCI Europe over the last 20 years. But Nordic bonds are also interesting for investors. The high-yield segment (high-yield corporate bonds) is particularly worth mentioning here. There are several reasons for this.
Yield premium
The most important factor from an investor's point of view is certainly the attractive yield premium. On average, it is currently around 200 basis points higher than for high-yield bonds with comparable credit risk in the USA and the rest of Europe. One reason for the premium is that some companies on the Nordic high yield market do not have an official rating. This is seen as a flaw in the market and requires a corresponding premium. Added to this is the often relatively low volume of bonds issued. In relative terms, however, new launches in 2022 and 2023 were largely stable compared to other high-yield markets.
The DNB Fund High Yield outperformed the benchmark index. While the fund has increased by around 24% since January 2017, the Bloomberg Pan European High Yield Index has only increased by around 14% (as of 6 October 2023).
DNB Fund High Yield vs. Benchmark
Source: DNB; As of: 6 October 2023
Additional advantages
Overall, the Nordic market for high-yield bonds has quadrupled over the past ten years. Many investors do not realise that the breadth of the market has also increased significantly during this period. In addition to the traditional oil and gas sector, sectors such as property, telecoms & IT, industry and banks are now also strongly represented. Market growth has therefore been increasingly driven by sectors and companies that are not active in the oil and gas sector. As a result, the Nordic high yield market hardly differs structurally from a global high yield benchmark index.
The increased market spread and the significant increase in the number of issuers enable the creation of a broadly diversified portfolio. This reduces default risks. At the same time, there are diversification effects in the investment portfolio. This is because the Nordic economies continue to have a relatively low correlation with other global markets.
Another advantage is the low interest rate sensitivity. This is because durations are largely short compared to the high-yield markets in the USA and the rest of Europe. This is due to the high proportion of floating rate notes with variable interest rates.
Sustainability by tradition
The Nordic markets are also characterised by their strong commitment to sustainability. In the Scandinavian economies, this is not just a trend, but part of the DNA. After all, these countries are and have always been ESG pioneers.
Today, sustainability reporting and commitment to climate neutrality is on average even higher for high yield issuers than for investment grade bonds. In addition, DNB's fund management focuses on companies that have credible plans and can demonstrate that they have appropriate means and strategies in place to reduce their greenhouse gas emissions in the long term.
Outlook
High-yield bonds from Northern Europe are likely to generate attractive returns over the next two to three years. In the event of a soft landing of the economy, yields of around eight per cent are possible. However, the risk of an abrupt economic downturn cannot be ruled out. If this were to happen, not only equities but also high-yield bonds could come under pressure due to rising default risks.
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