L-shaped recovery

L-shaped recovery

One of the things I've been pondering lately is the rate of the future stock market recovery in Finland. During the pandemic, we saw a so-called V-shaped recovery, where the stock market fell sharply, but a mega-recovery quickly lifted share prices to new highs. The stock market loosely follows corporate results. If the outlook for companies remains bleak, the stock market will also suffer. Without earnings growth, there is no point in splurging on stocks.

In the US, stock markets have risen in a V-shape to new highs since the inflation shock of 2022, thanks to rising earnings and a roaring economy. This time, Finland's recovery looks more like an L-shaped plateau.

Many companies have noted that the business environment has bottomed out last year, and the recovery has been slow. For example, in the IT services sector, Witted commented that demand slumped in the summer and has taken time to recover. Accounting firm Talenom, which has an excellent window on the Finnish SME sector, says that its clients' business bottomed out in the fall and the upturn has taken its time. Steel giant Outokumpu reports that demand in Europe slowed slightly in the fall.

A growing number of listed companies have responded to the weak outlook by focusing on profitability and cutting back on staff and investments, for instance Fortum, Nokia and Stora Enso. In a way, the above-mentioned Witted embodies this evolution. The company, which has seen a growth rate of almost 100%, went public in 2022 in search of further growth. But now, with the market struggling, the company is focusing on improving profitability.

While staff and cost cuts can be terrible tragedies on an individual level, it also means that listed companies are defending their profitability. The next boom will start again with a trimmed cost structure and good earnings potential (until over-optimism causes companies to over-invest).

To some extent, the economic situation reminds me of the period after the euro crisis. The Finnish economy was doing poorly, and the government was trying to rein in public spending (i.e. cutting other people's income). The European economy was stagnant, and companies were focused on improving profitability with modest growth drivers. However, Nasdaq Helsinki performed reasonably well after the euro crisis, so the flat economy of recent years has been a much harder experience for investors.

When evaluating the result drivers of Nasdaq Helsinki, it’s worth focusing primarily on the European economy. Germany, Finland's main trading partner, was knocked off its feet by the energy crisis and the country’s economic confidence indices have continued to falter. The Nordic countries are teetering on the verge of recession. Meanwhile, China, a major driver of global investment, is notoriously hiccupping.

Despite the obvious weakness in Europe, several European stock markets are near or at all-time highs. Swedish equities have also developed well. In this sense, Nasdaq Helsinki’s poor performance is explained by its narrow range of sectors that are poorly positioned in a weak global economy.

Although many of our large companies are international and the Finnish economy is of little importance to them, a lot of smaller companies are driven by Finland. And Finland is on the brink of recession. As can be seen from the National Audit Office of Finland’s business cycle indicators, the economy is as bad as it was in the early 2010s. The construction sector in particular is suffering due to the rise in interest rates.

For Nasdaq Helsinki, a fall in interest rates and a pick-up in global economic momentum reaching all the way to Finland would be a welcome development. Currently, the IMF expects the global economy to grow at a rate of over 3%, which is the "normal level" in the post-financial crisis era. It may be that the investment-driven companies on Nasdaq Helsinki could use an acceleration well above that 3% level to get their revenues properly up.

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