The reaction to the virus outbreak was not one of denial at Nordic governments. The responses have been decisive, swift and wide to contain the first fall outs. Let's take a firm look in the rear–mirror on what the Nordic countries looked like when the crises set in.
This is about a few weeks ago, but it seems like a lifetime.
The rate of response has varied in the Nordic Countries. Finland, where Evli is based, has a certain legislation for times of crises or national threats. This legislation was activated in March, giving the Finnish government powers to act in resolute manner, opening crises – time stockpiles of medical supplies, drugs, petrol and other.
Good perspectives for the Nordic countries before the crisis
As the virus crises began in February, all of the Nordic countries were facing a good future, the prospects for the economies were bright, to name a few: current accounts where all in surplus and higher than in Western Europe, government debt significantly lower than in Western Europe etc. By and large we had a picture of healthy economies.
The macro expectations turned around very quickly in February and March and keeps deteriorating. This turn around in expectation hit the Nordic market by surprise in March.
Then Three Black Swans passed by:- Oil crashed overnight 30% and continued - Norway hit hard
- Covid-19 closed Europe overnight – Export oriented economies suffered
- Issuing companies themselves jammed the Nordic Commercial Paper market – Selling shorter duration corporate bonds was the place where investors could still get some cash.
- End-client redemptions were low in Nordic, but big technical outflows in a temporarily illiquid market:
- Outflows in Finland dominated by cash piling in short duration funds due to jammed CP market
As a result, Nordic bonds had a big draw-down in March 2020:
- In an extreme, sudden ‘Dash for Cash’ capitulation, for the first time the liquidity in the Nordic market was not enough to digest all the various waves of selling
- In previous crisis (Q4 2018 sell-off, Commodity Crisis ’16, Euro Crisis ‘12 and even during the Financial Crisis ‘08-’09) liquidity was in the Nordics much better because the sell-off happened over much longer period of time. In Q4 2018 Nordic bonds had shallower draw-down than EUR IG.
What are the outlooks for the Nordic countries today?
- Nordic countries have been able to reduce the worst impact of Covid-19
- Initial strongest recovery has been in EUR IG (ECB) and EUR HY (biggest draw-down)
- Nordic bonds always have a slower reaction to sudden market movements
- Defaults will rise, but markets have priced in defaults in all bond asset classes in amounts never seen before
- Downgrades will be seen, creating great opportunities for the flexible investor in the BBB-BB category
- Loan guarantees for firms (4% of GDP), most notably via Finnvera, the state’s financing and export credit company;
- Increase of grants (0.1% of GDP): the public funding agency Business Finland's grant authorisations are increased to permit immediate business support measures;
- Faster lay-off procedures to avoid bankruptcies (i.e. the notice period are shortened from 14 to five days);
- Temporary reduction in employer pension contributions; and
- Other tax measures
How have Evli's credit funds adapted to this crisis?
- Philosophy and process still unchanged, focus on rated and unrated BBB-BB companies with low debt and good free cash-flow
- Cash levels maintained and credit quality slightly improved during March sell-off
- Average debt levels still very moderate, why default rates are expected to be less severe than in the general market
Coronavirus concerns led to a major sell off in all risky assets. Corporate bond spreads widened extremely rapidly as investors were fleeing all credit markets. Both Investment Grade and High Yield bond spreads widened massively during March, Investment Grade by 122 basis points and High Yield by 350 bps. Spreads for both markets are in the cheapest 10% percentile in history since 1999, which we think are very attractive from a longer-term perspective.
Petter von Bonsdorff
