Norway, the most profitable investment so far in 2009
Investors that bet on Norway in 2009 were not mistaken. Investment funds in local bonds, equity funds, money markets or fixed-interest funds surpassed the 10% profitability rate in January.
According to categorical data from Morningstar, at the January closure, investment funds in bonds issued in Norwegian kroner achieved a profitability rate of 12.73%, while equity funds reached 12.43% and completing the podium were money market funds in Norwegian kroner at 12.29%. Additionally, short term fixed-interest funds in Norwegian kroner yielded 10.86%, while equity funds in Norwegian kroner offered 10.25%. For this reason, this Nordic country occupied 5 of the top 6 positions in last month’s Morningstar ranking by category. Only high-yield bonds in dollars (11.92%) managed to make it onto the list.
Behind the Scandinavian country’s positive evolution are three possible keys: On one hand, Norway might have benefited form the gas crisis between the Ukraine and Russia, becoming the alternative supplier for Eastern Europe. This helped them partially offset their drop in worldwide exports (mainly petroleum) during the second half of 2008. Norway is the world’s third-biggest petroleum exporter and the biggest one in Eastern Europe. Petrol represents 27% of their GDP. However, the process has begun to substitute their exports in order to concentrate on gas. Thus, gas shipments increased by 11% in 2008 and it is expected that gas will increase from 40% to 49% of their total fuel exports by 2013.
Secondly, the Bank of Norway (Norges Bank), despite interest rates lowered on the 4th of February (50 basic points, to 2.5%) and the 100 basic points they lowered by in October, they still have a long way down. Experts at JP Morgan predict that the rates could go even lower than 2% in the next few months.
This is an opinion shared by experts at Citi, who state that besides the country’s capacity to use its reserve funds that come from petroleum for economic stimulus, it allows the Norges bank “to be one of the few central banks that will be able to keep interest rates above zero over the next few quarters”. They predict that interest rates will fall to 1.5% at the end of the second quarter and then will be paused. This downward evolution of rates, together with the decrease in exports, has been felt by the local currency, the krone. According to JP Morgan, “as with other highly-profitable currencies, the change in the interest rate cycle in Norway has given an additional stimulus to the liquidation of the long positions. The weakness has been especially severe against the yen and the dollar. The euro/krone exchange rate went above the maximums of 2004, breaking the 9.00 crown barrier for the first time.
Fiscal stimulus program
Lastly, investments in Norway have been driven by the fiscal stimulus plan that was approved in October and will mean around 1.2% of the GDP for 2009. (about 20 billion krones). “It means 16.75 billion in additional public expenditures and 3.25 billion in fiscal reductions for commerce and industry,” explains Citi. If they go ahead with the plan, together with measures approved previously, the stimulus for local demand will increase to up to 2.3% of the GDP for 2009. “This means very expansionist budgets for 2009, both in a historical and international context. Compared to the four biggest countries of the euro zone, Norway’s fiscal stimulus plan in relation to GDP will be similar to that of Spain (2.3%), and much greater than those of Germany (1%), France (0.7%) or Italy (0.3%), according to Citi.
The government of the Nordic country has provided 350 billion krones to banks to improve liquidity, exchanging public bonds for treasury bonds. The export guarantees through GIEK (Guarantee Institute for Export Credits) have also been increased by 50 billion krones and a special loan program established (30 billion krones) to facilitate contracts that allow for the use of loans for exports.