In times of declining investor confidence in big global currencies, such as EUR and USD, and with CHF and JPY at multi-year highs, we believe SEK and NOK should continue to benefit from investor inflows, given their stronger fundamentals.
We recommend diversifying currency exposure into the two Scandies, given their superior fundamentals. Both have significantly lower debt-to-GDP ratios than the big economies and show stronger commitment to reducing them. Additionally, both are expected to continue growing at a stronger pace than the rest of Europe, supported by emerging market exports and domestic demand. Their central banks, Sweden's Riksbank and Norway's Norges Bank, offer higher interest rates than the European Central Bank (ECB), the Bank of England or the US Fed, making their currencies, the Norwegian krone (NOK) and the Swedish krona (SEK), attractive carry trade currencies.
Given their relatively small capital markets, both currencies are volatile in turbulent market environments. In the current scenario of slower growth in Europe in the first half of 2012, it cannot be ruled out that the two Scandinavian currencies will see higher
volatility, on the back of weaker industrial exports from Sweden or Norway. However, due to their solid fundamentals and a possible European recovery in the second half of 2012, we see the Scandies stronger in the long run and consequently recommend
using potential setbacks to enter long positions in SEK and NOK at even cheaper levels.
Recent developments and recommendation
The ECB's long-term refinancing operations have fundamentally decreased the systematic risk in Europe and therefore spill-over risks to SEK and NOK.
After the strong rally of the NOK given the Brent oil price increase, Norges Bank cut its interest rate to prevent further appreciation. The Swedish Riksbank also cut rates due to weaker economic development on the back of the Eurozone slowdown. However,
we do not expect either central bank to cut rates further, reducing short term risks. Further, both central banks can be expected to be the among the first in Europe to start raising rates at the end of 2012.
At a glance
- Norway and Sweden provide a number of supportive macroeconomic "safe haven" characteristics for long-term diversification.
- Given the current macroeconomic scenario of a eurozone recession in 2012, short-term setbacks in these currencies cannot be ruled out. However, those should be used to enter long positions in SEK and NOK at even cheaper levels.
- Overall, investments should offer bond yields of 2%-4% on short duration, combined with expected currency appreciation of 3%-6%.
Source: Reuters Ecowin, UBS WMR, 2011
UBS Chief Investment Officer's monthly assessment
Further reading on next month's economic outlook:
Chief Investment Officer's monthly