HEX strikes back

The much-maligned Helsinki Stock Exchange (also playfully known as Hesuli in Finland) has hoisted itself back above the mythical 10,000-point mark. While stock markets in other parts of the world generally bottomed out in the fall of 2022, HEX continued to find new lows as late as last fall. An upturn in the European and global economies and the easing of corporate headwinds should, however, pave the way for Nasdaq Helsinki to rebound. 

HEX can be characterized as rather investment-driven, and the rise in interest rates and the slowdown in both the Chinese and European economies have not been a pleasant experience for listed companies.

HEX is also quite concentrated: The 15 largest companies account for roughly ¾ of the total market capitalization of the entire stock exchange. As a result, individual setbacks (and successes in good times) are magnified. Nordea accounts for around 16% of the weight-capped general index, which has a market capitalization of around 250 BNEUR. In the OMXH25 index, which can be invested in via an ETF, Nordea, UPM, Nokia, Sampo, and KONE all hold the maximum weight of 10%. This means that the overall development of the stock market is driven by just a handful of companies, even though there are almost 200 listed companies in Finland.

KONE, for example, has been hit by the cooling of the Chinese construction market, UPM by the downturn in the forest sector, and Nokia by the difficult network market. Neste, whose market value has plummeted from 50 BNEUR to less than 20 BNEUR, has been viewed with suspicion by investors. The concerns are rooted in the company's weakening sales margins for renewable fuels and growing capacity in the market.

But in the shadow of Nasdaq Helsinki's poor performance over the past few years, there is also some cheerful news beyond the memes on Inderes' investment forum. Our most valuable listed company by market value, Nordea, is in the best shape of its life and the stock is close to its all-time high with a dividend yield of over 8%. UPM has continuously invested in growth.

Surprisingly little discussion has been generated by large industrial companies, whose share prices have exploded. They bottomed out in the fall of 2022, when global economic concerns were at their highest. Cargotec, Konecranes, and Wärtsilä have gained 150-200% in 1.5 years.

Investor sentiment changes with share prices. This is best illustrated by the sauna company Harvia. In the fall of 2022, when the share price crashed to a low of EUR 13, Harvia's heaters were considered doomed. Now that the stock has soared back to the "eating my hat" level of EUR 40, the comment "only the sky's the limit" has been witnessed on the Inderes forum. From what I've seen, the quality of Nasdaq Helsinki companies was grossly overestimated in the easy breezy market environment of 2021, but last year also saw an exceptionally difficult environment, especially for Finnish companies.

What if the truth lies somewhere between the extremes of 2021 and 2024?

Small listed companies in particular have taken a hit. While the OMXH25 large companies with their dividends are only 10% off the ATH, the Nasdaq Helsinki small-cap index is still 40% off the 2021 peaks. And these figures are all nominal: inflation has eroded the purchasing power of the average Finn by about 13% since the fall of 2021.

While I believe we have been in a bull market for over six months now, we should not get too excited about our domestic stock market unless there is further global economic expansion. Hundreds of percent rallies are unlikely to be repeated any time soon, at least for the stocks mentioned above.

The pricing level of Nasdaq Helsinki, as measured by the (forward-looking) P/E, is around 13x. The return on equity has been 12-13%. Since the main market is Europe or mature industries (such as forest, banking, network market, and anything associated with GDP growth like cranes and such), sustainable long-term earnings growth cannot exceed Europe's nominal growth rate by much. If Bloomberg forecasts Europe's long-term economic growth to be below 1% and inflation to be in the 2% range, long-term nominal earnings growth would be in the 3% range at best. Even with these specs, one could argue that HEX deserves at least roughly the same multiples as the rest of Europe, in which case the P/E would be in the 14-15x range. This level would also be in line with the average median valuation of Nasdaq Helsinki over the last 20 years or so, which spans a wide range of economic and interest rate environments.

Of course, Nasdaq Helsinki does not operate in a vacuum. It would be strange if the Finnish stock market did not tap into the international bull market when stock markets elsewhere are already at new highs. On the other hand, in the back of my mind I worry that Helsinki's surge will be short-lived. For example, a possible slowdown in the US economy is unlikely to stimulate stock markets elsewhere in the world. It may be that Nasdaq Helsinki will only join the party moments before the last call. There will be a rush to order drinks and get out of the tavern before the cloakroom gets crowded.