Small cap seminar in Stockholm
Portfolio managers Kenneth Blomqvist and Markus Larsson visited a very well attended Nordic small cap seminar in Stockholm in September for some three days. Around 350 investors were present, of which more than a third from continental Europe, US and even from Australia. The record attendance gives an indication that the Nordic markets are in a very interesting state. The background is that Nordic smalls caps have underperformed the large cap peer group for approximate two years and now trade at record discount of 25% to the larger peer group.
From a macroeconomic point of view the Swedish and Finnish markets are hit by residential construction which has halved from last years as higher interest rates limits demand. The consumer has been hit by higher interest rates, as mortgage loans are tied to short reference rates. Thereby the interest rate has risen to close to 4 %. Also, there are some challenges in the real estate sector. Among investors there is a waiting game for a signal of lower interest rates in the future, which probably is key for small cap performance and stronger, but for the time being record low, Swedish and Norwegian kronas. Consensus seems to predict lower central bank interest rates in Sweden in the spring or summer next year.
At the seminar companies in the industrial space have started to feel some of the weaker economic development in demand and order intake. The focus seems to be to prepare for weaker times, by securing cash flow and devoting more attention on working capital. As a result of challenges earlier in the supply chain, many companies now release capital by reducing inventory levels. The strongest and most qualitative companies focus on gaining markets share in difficult times- for instance c-parts and logistics solution company Bufab, who seem to have some measures to improve the handling of working capital and cash flow. Also, circuit board company NCAB could be ready for acquisitions and come out stronger of a period with weaker demand.
On the other hand, investments in energy transition seem to proceed as earlier. Wind park developer OX2 was surprisingly confident on sufficient funding and returns to continue the development of their 30GW portfolio, despite rising costs and interest rates. Demand within hydrogen, battery, hydropower, mining and electrification seems to continue on a solid path according to consulting company AFRY.
Despite a tough environment consumer confidence has started to rise from bottom levels. The consumer related companies were somewhat more optimistic as the comparisons from low demand a year ago start to ease and turn to flat or modest growth. In this category, Revolution Race and Boozt seem to do relatively well. This despite the fact that interest rates burden the consumer as we speak. However residential builder JM is still cautious when it comes to starting new projects.
Within the medical technology space radiation equipment company Elekta seem to gain pace when it comes the result development. Demand is there for the long term as radiation treatment devices still pose a low penetration and there is a need for equipment and margins are set to improve. Also, Tobii Dynavox gave a solid impression.
Our take from the seminar notes record attendance, showing huge interest in the beaten Nordic small cap market. There are a lot beaten stocks who for the time being are out of favour. Bargains are up for grabs for the one who dares to take a long-term view.
Markus Larsson, Portfolio Manager
Kenneth Blomqvist, Portfolio Manager