Nordic Small Cap Innovation opportunity
22.01.20
Insights

Nordic small cap – Opportunities in the innovative growth end

Dag A.D. MESSELT

How did the Nordic small caps fare in the turbulent period following the risk off at the end of 2018? And is this creating opportunities? We think so.

As investors, we follow the relative performance of a number of buckets, to understand our performance, but also to identify opportunities. This can be groups of companies like cyclicals against defensives, growth against stable earners or what I will discuss here; small caps against large caps.

Nordic small cap performance compared to Nordic large cap

As seen in Figure 1, the Nordic small caps have underperformed Nordic large caps in the period starting with the risk off trade at the later part of 2018 up until end December 2018. In the following bounce, we see that Nordic small caps catched up with the Nordic large caps.

FIGURE 1 – Nordic Small Cap and Nordic Large Cap performance rebased to 100*

2020 01 Insight Nordic Small Cap Performance Figure 1
Source: Bloomberg. Nordic Large cap represented by Vinx Benchmark Index TR Net and Nordic Small Cap represented by Carnegie Nordic Small Cap Index TR Gross. Historic performance is not an indicator of future performance. *on 3/9/2018

Nordic smaller small caps performance compared to Nordic larger small caps

If we now look closer at the Nordic universe, is this relation really true within the Nordic small caps?

FIGURE 2 – Nordic smaller small cap and Nordic larger small caps performance rebased to 100*

2020 01 Insight Nordic Small Cap Performance Figure 2
Source: BNP Paribas Asset Management. The universe is represented by the Carnegie Nordic Small Cap Index. Historic performance is not an indicator of future performance.*on 3/9/2018

As can be seen above in Figure 2, the picture is different when looking closer to the different buckets within the Nordic Small Cap universe in the same period.

What are the drivers behind the movements? Uncertainty leading to higher required risk premiums particularly liquidity risk premium? We see that liquidity is a factor that partly explain the phenomenon. There is a certain link between market cap and absolute liquidity. Hence, this would hit the smaller small caps harder than the larger small caps.

We notice that in the latter part of 2018, the smaller small caps did underperform, particularly the market caps between 1,5 and 3 bn EUR. There is a relatively high proportion of private money in the smaller Nordic small caps and a lot of private money was pulled out from the market in the risk off trade.

At the beginning of 2019 markets bounced up again, but we noticed the money entering was not the same that left the market before year end. We now saw institutional money entering the market that wanted to benefit from the lower prices. But this money did not buy the same exposure, they had a higher liquidity requirement and bought larger small Caps. The can be seen above as the market caps of 3bn EUR and more outperformed the ones between 3bn and 0,5bn EUR.

Industrials and Real Estate are the biggest sectors in the Nordic small cap universe

Let us have a closer look at the two biggest sectors that also saw important relative performance in the period.

FIGURE 3 – Sector distribution (%) of the Carnegie Nordic Small Cap index

2020 01 Insight Nordic Small Cap Performance Figure 3
Source: Bloomberg, 31/12/2019

Nordic Industrial small cap suffered from uncertain trade and economic outlook

The uncertainties around the difficult US-China trade discussions that has had its ups and downs in the year, but as a whole this had made industrial small caps suffer in total. The worst period was in the late spring when the optimism and hope for a near solution faded.

FIGURE 4 – Nordic Industrial small cap and Nordic small cap performance rebased to 100*

2020 01 Insight Nordic Small Cap Industrial Performance Figure 4
Source: Bloomberg. Historic performance is not an indicator of future performance.* on 2/1/2019

Nordic Real Estate small cap performing well with falling bond yields

Thereafter, another market move came as a result of a steep fall in the long yields as economic growth expectations cooled off. This benefitted the dividend stocks or “bond alike” stocks like real estate and forestry. On the other hand, it hit low paying dividend growth stocks.

FIGURE 5 – Nordic Real Estate small cap and Nordic small cap performance rebased to 100*

2020 01 Insight Nordic Small Cap Real Estate Performance Figure 5Source: Bloomberg. Historic performance is not an indicator of future performance.* on 2/1/2019

The different Nordic small cap fund styles and tilts lead to a wide range of performance outcomes

In this market, the performance of a Nordic small cap fund has been very dependent on the type of exposure it has, or with other words, it has depended on the style and tilt of the fund.

Smaller small cap investments tilted to growth has underperformed the larger small cap investments tilted to “bond alike” stocks.

FIGURE 6 – Selected Nordic Small Cap funds performance rebased to 100*

2020 01 Insight Nordic Small Cap Performance Figure 6
Source: Bloomberg. Historic performance is not an indicator of future performance.*on 1/8/2019

What Nordic small cap segment to choose for the long run?

The question today is really where do you wish to be in the long run?

We find that the segment of smaller small cap growth companies exposed to the well-known strong Nordic innovation could be interesting. Here we find for
instance Nordic high tech Industrials and Nordic high tech Medical companies. This segment has suffered since the risk off trade at the end of 2018 and today
we find them more interesting than what we have for a long time.

ordic smaller small caps in the innovative high tech industrials and medical tech sectors offers high risk premium that can be interesting!

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Investments in funds are always related to risk. Past performance is no guarantee of future results. Performances are calculated net of fees. Investments in funds are subject to market fluctuation and risks inherent in investing in securities. The value of investments and the revenue they generate can increase or decrease and it is possible that investors will not recover their initial investment.