By Danilo Masoni
Finland's beaten-down stock market may offer value for investors next year, money managers say, with a potential global economic recovery set to lift the cyclical stocks that dominate the index and NATO membership easing perceived Russia risks.
Finnish stocks are Europe's biggest laggards this year, as risks stemming from tensions with Russia and concerns over China's stuttering recovery have hurt its exporters. In addition, big funds have favoured global mega caps over smaller firms, which make up a large portion of the Nordic country's equity landscape.
The top 25 stocks in Helsinki are worth a combined $150 billion. Europe's most valuable firm Novo Nordisk, alone, is worth three times that. The OMX Helsinki 25 has lost 10% this year, versus the STOXX 600's 8% rally.
Tomas Hildebrandt, senior portfolio manager at Nordic fund manager EVLI, sees Finnish stocks as cheaply valued and likely to benefit from an economic recovery he expects could gain traction in 2024.
"I don't see any structural issues at the moment that would really spin the global economy into a deeper recession. Hence, I think that the bottom will be reached at some point," said Hilderbrant, who is overweight Finland, but underweight Europe.
"We might be early in our call, but with the outlook of a shallow recession, markets will start to look for a cyclical recovery sometime during next year".
GLOBAL DOWNTURN
Industrial stocks have suffered from a global manufacturing downturn that started in 2022. A recent Deutsche Bank study, however, showed some leading indicators -- like South Korean semiconductor exports, which rose in October for the first time in 16 months -- are pointing upwards.
A recovery should benefit other export-driven markets in Europe, although Finnish equities look more of a bargain. They suffered a harsher derating due to their greater exposure to China and selling linked to concerns over tensions with Russia.
In April, Finland joined NATO, ending seven decades of military non-alignment and roughly doubling the length of the border the organisation shares with Russia.
"Some foreign investors have been selling Finnish stocks after the Ukraine war started due to Russian proximity, but the country risk has declined after Finland joined NATO," said Hertta Alava, senior strategist at the country's top bank Nordea.
Elevator maker Kone, Helsinki's biggest industrial stock, sold its Russian assets in October, 20 months after Russia invaded Ukraine. It has struggled because of its large exposure to China's property sector.
Kone's update to end-September saw orders falling less than expected thanks to what CEO Henrik Ehrnrooth called a "fantastic quarter" in China. Following a 14% slide this year, the stock is 10% cheaper than rivals Zurich-listed Schindler and Otis in the U.S., having traded at a premium of around the same size to both in the last 5 years, according to LSEG data.
Other underperformers include cyclical material companies such as forestry firms Metsa Board and Stora Enso, and stainless steelmaker Outokumpu.
"A LOT IS PRICED IN"
Finnish industrials have commanded an average premium of 28% over European peers in the last decade. That gap has narrowed to a 14-year low of 6%, LSEG data shows.
Nordea's Alava said this group had potential to outperform Swedish and French industrials over the next two years, while the broader Finnish market had stronger earnings upside.
According to LSEG, OMX Helsinki 25 earnings are seen growing 12% in 2024, faster than the 6.7% rise seen for the STOXX, after falling 16% and 1.2% respectively this year.
"Finnish stocks are attractively valued and a lot of bad news is priced in," Alava said.
"If the European economy recovers in 2024 as I expect, Finnish cyclical stocks should recover too... this could be a good time for long-term investors to increase holdings".
(Reporting by Danilo Masoni; Editing by Christina Fincher)