ENOR And NORW: The Heavy Weight Champions In Norway

| About: Global X (NORW)

Summary

The Norwegian Economy is well prepared for a long economic downturn.

The sovereign wealth fund is the world’s largest and supports many social and public services.

Although the economy is very well diversified, the MSCI index is too heavily focused on energy.

A Petro-economy derives its economic health from the capital inflow of revenues from the sale of crude or products refined from domestically produced crude. The capital generated by the private sector is reinvested back into the economy in many ways. First and foremost, private sector petro-capital is reinvested into the petroleum infrastructure to produce more products or to produce at lower costs. This petro-dollar recycling generates jobs directly or indirectly through the need for more equipment or infrastructure or the replacement of depreciated equipment. Otherwise, capital is returned to debt holders and shareholders increasing individual free capital for discretionary spending. Hence, the private sector petroleum industry is an engine of economic growth. In the United States, the mid-western and north-eastern regions have developed private sector driven regional petro-economies. However, in the U.S., the petroleum industry is large, but just one out of many engines of economic growth. The Canadian and Mexican economies are similar. In fact, Mexico had been privatizing its oil industry well before the price collapse and had even successfully auctioned off a number of potential new fields in the midst of the price collapse.

On the other hand a Petro-state is one for which the government maintains partial or majority control of the industry, deriving revenues and then reinvesting and redistributing by paying for non-discretionary expenditures like healthcare, paid leave, pensions, subsidized public transit, education and general social services, as well as reinvesting in the industry. In many cases these revenues are saved by investing in a strong sovereign wealth fund. This is accomplished by increasing currency reserve, purchasing equities, fixed income assets or real estate both domestically and internationally. In a petro-state the government redistributes revenues in such a way that it 'frees up' individual capital which otherwise would be allocated towards non-discretionary spending. Conversely, in a petro-economy it is the private sector which redistributes revenues indirectly, providing more individual free capital in excess of what is needed for non-discretionary spending.

Both systems have their merits and both have their risks.

In actuality, each type of system is more of a hybrid of one or of the other. Take for example, Norway, which leans more toward the petro-state model. Its central bank, Norges Bank is the nation's central bank as well as the manager of the nation's sovereign wealth fund:

"... In Norges Bank Investment Management we are more than 500 people who manage the Norwegian oil wealth. Our mission is to ensure financial wealth for the Norwegian people through responsible management of the fund..."

Norges Bank is a global model of fiscal responsibility as well as wealth management. In fact, the media quite often refers to Norges Bank's Investment Management fund as the country's 'rainy day' fund. To put the banks management in perspective, Norges Bank is the only one of the Nordic central banks with a positive base interest rate (known as the Key Policy Rate) at 0.75%. This is currently higher than the U.K.'s 0.50% Bank Rate and the U.S. 0.25% - 0.50% Fed Fund's target rate. Other central banks in the region have few alternatives other than near zero or even negative rates. Yet, Norges Bank is well positive even in these difficult economic times. The $810 billion fund is a solid backstop, helping the central bank to avoid those extreme measures.

Norway is a very productive economy when compared with its neighbors as the per-capita GDP chart demonstrates.

Per Capita GDP Regional Comparison Column Chart

Data from the World Bank

Further, Norway has the lowest populations of its Nordic neighbors, hence that wealth is concentrated.

Regional Population Comparison Column Chart

Data from the World Bank

Hence, Norway has perhaps the largest economic backstop in the world, and yet has a relatively small population. Those two factors alone demonstrate that the Norwegian economy is well prepared to weather an economic storm. The current global petroleum price collapse the worst possible of all possibilities for Norway. Over 80% of Norway's exports are destined for European nations and of those exports over 60% are petroleum related.

Norway

Data from OEC

On the other hand, Norway's import indicates that it isn't an all petroleum economy but rather an advanced industrial economy as well.

Norway

Data from OEC

Hence, Norway's economy is heavily but not entirely dependent on petroleum, has a well-managed economy prepared for economic down cycles and lastly a population with discretionary spending power. The question is whether or not this is a good single country focused investment. There are two single country focused ETFs which dominate this subsector. One is the iShares MSCI Norway Capped ETF (BATS:ENOR) and the other is the Global X MSCI Norway ETF (NYSEARCA:NORW).

Characteristics

Comparison

Inception Date

Net Assets

(Rounded)

Shares Outstanding

30 Day SEC Yield

P/E

Price/ Book

Total Fees

Recent Price with Premium/ Discount

Global X NORW

55 Holdings

11-9-2010

$52,900,000.00

1,000,000

2.56%

10.89

0.99

0.50%

$8.73 @ 1.51% above NAV

iShares ENOR

55 Holdings

1-23-2012

$19, 940,000.00

6,150,000

3.91%

7.07

1.20

0.53%

$16.82 @ 0.23% below NAV

Click to enlarge

Data from Global X and BlackRock

Annualized Return Comparison

1 Year

3 Year

5 Years

Since Inception

Global X NORW

55 Holdings

-20.45%

-13.61%

-6.71%

-5.62%

iShares

ENOR

55 Holdings

-15.72%

-10.10%

************

-4.55%

Click to enlarge

Data from Global X and BlackRock

Both track the MSCI Norway IMI 25/50 Index. The Index is capped in accordance with IRS requirements for this type of fund:

"...at the end of each quarter of its tax year no more than 25% of the value of the RIC's assets may be invested in a single issuer and the sum of the weights of all issuers representing more than 5% of the fund should not exceed 50% of the fund's total assets..."

Data from Global X and BlackRock

Data from Global X and BlackRock

Data from Global X and BlackRock

There is very little difference between the funds. Both follow the index passively, both contain exactly the same companies (as of 2/16/2016) and both weight individual holding nearly identically. At this point it's worth mentioning an old saying: "Wall Street isn't the economy." This small bit of number crunching wisdom applies here. In particular, a single country focused ETF is not the economy, in this case Norway. The funds, by way of the MSCI index, heavily weight the Energy Sector and then do so with many smaller companies. Several have market caps between $100 million and $300 million, in U.S. Dollars; small caps by any standard.

Energy

Market Cap

(USD Billions)

Yield

Payout Ratio

5 Year Average Dividend Yield

Total Debt/Equity

P/E

Price/Cash Flow

EPS ((NYSEARCA:USD))

Statoil ASA (NYSE:STO)

$42.293

6.87%

NMF

5.10%

80.19

12.17

3.77

-1.37

SubSea 7 SA (OTC:ACGYF)

$1.882

0.00%

0.00%

NMF

9.55

NMF

17.03

-1.789

TGS Nopec Geophysical (OTC:TGSNF)

$1.358

1.30%

92.54%

NMF

NMF

NMF

2.77

-0.28

Det Norske Oljeselskap (OTCPK:DETNF)

$1.235

0.00%

0.00%

NMF

485.85

NMF

41.05

-2.19

Hoegh LNG Holdings (OTC:HOLHF)

$0.708

4.37%

0.00%

0.00%

214.75

NMF

NMF

-0.93

Seadrill Ltd (SDRL)

$0.831

0.00%

0.00%

0.00%

122.57

1.26

NMF

-1.75

Petroleum Geo-Services (OTCPK:PGEJF)

$0.595

3.71%

NMF

NMF

70.69

13.44

2.03

-1.34

BW LPG (OTCPK:BWLLY)

$0.894

28.32%

49.76%

NMF

83.35

2.88

2.30

+2.28

DNO ASA (OTCPK:DTNOF)

$0.789

0.00%

0.00%

0.00%

66.62

NMF

NMF

-0.21

Aker Solutions (OTC:AKRTF)

$0.950

0.00%

0.00%

0.00%

56.99

6.69

3.74

+0.413

Ocean Yield ASA (OTCPK:OYIEF)

$0.757

10.76%

54.55%

NMF

158.99

7.11

3.75

+0.794

Prosafe (OTCPK:PRSEF)

$0.249

0.00%

0.00%

NMF

146.47

22.97

1.45

+0.36

Avance Gas Holdings Ltd (OTCPK:AVACF)

$0.303

54.56%

NMF

NMF

97.81

NMF

NMF

+0.617

Fred Olsen Energy (OTC:FOEAF)

$0.254

0.00%

0.00%

5.94%

132.10

NMF

1.04

-2.12

Akastor (AKKVF)

$0.183

0.00%

0.00%

0.00%

96.13

NMF

NMF

-1.03

Frontline Ltd (NYSE:FRO)

$0.149

11.64%

15.06*

5.67%

241.51

5.19

10.83

+1.66

BW Offshore LTD (OTC:BGSWF)

$0.104

0.00%

0.00%

NMF

184.40

NMF

2.26

-3.14

Tanker Investments Ltd

OL: TANIL

$0.348

0.00%

0.00%

NMF

137.05

58.51

4.36

+1.36

Averages

x-NMF

$2.99

6.75%

14.13%

* % of EPS

2.09%

140.295

14.469

7.414

-0.481389

Click to enlarge

Data from Reuters, Yahoo! Finance and Company Websites

The commodity collapse has had a deep impact on this sector. Many of these companies have negative earnings, including the industry giant and major holding of Norway's wealth management fund, Statoil at -$1.37 per share. Of the 18 holdings, only 8 reported dividend yields. Also, the sector has a high average debt to equity. Lastly, note that most of the companies with positive EPS are energy transportation/shipping, likely benefiting from the storage of petroleum on tankers as well as shipping the product point to point.

Financials

Market Cap

(USD Billions)

Yield

Payout Ratio

5 Year Average Dividend Yield

Total Debt/Equity

P/E

Price/Cash Flow

EPS

DNB (DNBHF)

$17.508

4.86%

27.34%

3.30%

439.76

6.17

5.56

+1.77

Gjensidige Forsikring (OTC:GJNSF)

$7.671

4.84%

84.43%*

7.66%

83.03

17.42

16.54

+0.81

StoreBrand ASA (OTCPK:SREDF)

$1.614

0.00%

0.00%

0.65%

87.09

11.01

9.16

+0.33

Sparebank SMN Primary Capital (SBRKF)

$1.052

4.24%

21.96%*

3.56%

446.01

5.18

NMF

+0.79

Entra Eiendom

OL: ENTRA

$1.473

3.70%

NMF

NMF

106.92

2.42

NMF

+3.31

Aker ASA (AKAAF)

$1.264

6.83%

NMF

6.27%

598.49

NMF

4.82

-0.36

Protector Forsikring ASA

OL: PROTCT

$0.685

3.28%

50.00%*

6.88%

10.85

15.23

NMF

+0.638

Sparebank Nord-Norge (OTC:SPXXF)

$0.395

5.90%

48.62%

3.56%

446.01

8.66

3.91

+0.79

Norwegian Property ASA (OTC:NRWGF)

$0.548

0.00%

0.00%

1.15%

164.63

11.80

11.53

+0.85

Selvaag Bolig ASA

OL: SBOL

$0.267

5.31%

32.85%

NMF

110.34

6.73

6.30

+0.423

Averages

x-NMF

$3.25

3.90%

33.15

* % of EPS

4.13%

249.313

9.402

8.26

+0.93

Click to enlarge

Data from Reuters, Yahoo! Finance and Company Websites

The Financial Sector is in sharp contrast to the Energy holdings. The average yield of this mix of banks and real estate investment companies is a respectable 3.90%; the average payout ratio indicates sustainability at 33.15%. However, this omits those with no available payout ratio data; an asterisk indicates no payout ratio was given; a dividend to EPS ratio is substituted as rough indication of dividend sustainability.

Consumer Staples

Market Cap

(USD Billions)

Yield

Payout Ratio

5 Year Average Dividend Yield

Total Debt/Equity

P/E

Price/Cash Flow

EPS

Marine Harvest ASA* (NYSE:MHG)

$6.264

4.51%

212.59%

12.12%

52.65

59.46

24.49

+0.225

Orkla ASA (OTCPK:ORKLF)

$8.012

3.69%

84.51%

7.05%

33.69

22.85

16.97

+0.04

P/F Bakkafrost
(OTC:BKFKF)

$1.569

2.47%

36.60%*

4.74%

17.23

14.74

12.62

+0.26

Leroy Seafood Group

OL: LSG

$2.041

3.73%

63.41%

5.34%

50.99

16.93

11.73

+2.21

Salmar ASA

OL:SALM

$2.099

6.27%

110.41%

6.51%

58.63

17.81

13.52

+1.03

Austevoll Seafood ASA (OTC:ASTVF)

$1.260

3.74%

66.29%

4.03%

79.02

17.72

6.01

+0.351

Averages

x-NMF

$3.54

4.07%

95.64%

* % of EPS

6.63%

48.70

24.92

14.22

+0.686

Click to enlarge

Data from Reuters, Yahoo! Finance and Company Websites

It should be noted that after petroleum, seafood products are Norway's next largest export. Further, seafood is an important Norwegian consumer staple product. Not surprisingly then, seafood dominates the sector holdings. One holding, Orkla is an exception. The company is an international retail distributor of diverse consumer products including grocery, personal care and textiles. Orkla is well diversified not only in product and company brands but also engages in property development and sales.

Telecom Services

Market Cap

(USD Billions)

Yield

Payout Ratio

5 Year Average Dividend Yield

Total Debt/Equity

P/E

Price/Cash Flow

EPS

Telenor ASA (TELNF)

$20.786

6.29%

93.44%

5.01%

130.72

52.42

6.57

+0.264

Click to enlarge

Data from Reuters, Yahoo! Finance and Company Websites

There is only one holding in telecom services. It's a major player in the sector domestically, in the Nordic countries as well as having major presence in Europe and Asia. Telenor has 203 million mobile subscribers in 13 markets, plus an additional 14 markets with over 200 million subscribers through its part ownership of VimpelCom (NASDAQ: VIP).

Materials

Market Cap

(USD Billions)

Yield

Payout Ratio

5 Year Average Dividend Yield

Total Debt/Equity

P/E

Price/Cash Flow

EPS

Yara International ASA (YRAIF)

$10.095

4.75%

38.76%

3.89%

20.42

10.76

5.76

+0.398

Norsk Hydro ASA (NHYKF)

$6.899

3.48%

177.42%

2.38%

11.11

49.91

9.06

+0.008

Borregaard ASA (BRGAY)

$0.724

3.04%

38.86%*

NMF

39.45

12.77

7.55

+0.448

Averages

x-NMF

$5.91

3.76%

85.01%

3.14%

23.66

24.48

7.46

+0.285

Click to enlarge

Data from Reuters, Yahoo! Finance and Company Websites

Yara International is primarily an agricultural products company although it does produce nitrate based chemicals for various industrial applications. Norsk Hydro is primarily a Bauxite and Alumina refiner and smelter. The company also operates 24 hydroelectric facilities, (hence the name), produces building materials and consumer electronics. Borregaard manufactures, markets and distributes bio-materials including biofuels, performance chemicals for building materials, agro chemicals, feeds, detergents, textiles and a plethora of other products for industrial or consumer retail use. The important point of the matter here is to note that Norway's economy is diversified. Note particularly that these companies may just as well be designated as 'diversified industrials' as they go well beyond materials alone.

Consumer Discretionary

Market Cap

(USD Billions)

Yield

Payout Ratio

5 Year Average Dividend Yield

Total Debt/Equity

P/E

Price/Cash Flow

EPS

Schibsted Class A (SBSNF)

$5.792

1.54%

25.03%

2.38%

33.33

24.88

23.41

+1.06

Schibsted Class B
(OTC:SBBTF)

$5.792

1.54%

25.03%

2.38%

33.33

24.88

23.41

+1.06

XXL ASA

OL: XXLA

$1.351

2.38%

59.35%*

0.00%

44.48

24.94

21.39

+0.391

Kongsberg Automotive (OTC:KGAUF)

$0.282

0.00%

0.00%

NMF

136.50

NMF

12.11

-0.58

Europris

OL: EPR

$0.660

0.00%

0.00%

0.00%

122.82

52.92

21.05

+0.087

Averages

x-NMF

$2.02

0.98%

21.10%

0.79%

84.28

34.25

19.49

+0.4036

Click to enlarge

Data from Reuters, Yahoo! Finance and Company Websites

The largest allocation of the Consumer Discretionary holdings is Schibsted Media Group. The company is a major media sector player with 6800 employees in 30 countries. As far as media companies go, Schibsted focuses on growth but is pretty much a standard media company. The important point as far as the fund goes is that the company recently split its stock but in an unusual way. The only difference between the classes A and B are the voting rights: 10 per class A share and 1 per class B share; (the table factors in the data just once).

Information Technology

Market Cap

(USD Billions)

Yield

Payout Ratio

5 Year Average Dividend Yield

Total Debt/Equity

P/E

Price/Cash Flow

EPS

Opera Software ASA (OTC:OPESF)

$1.128

0.39%

NMF

NMF

43.67

NMF

390.28

-0.36

Nordic Semiconductor (OTCPK:NDCVF)

$0.767

0.00%

0.00%

0.00%

8.89

28.32

21.85

+0.166

Atea ASA (OTC:ATAZF)

$0.855

9.29%

87.37%*

10.14%

40.26

18.82

9.19

+0.432

Rec Silicon ASA (OTCPK:RNWEF)

$0.268

0.00%

0.00%

0.00%

17.47

1.48

0.87

+0.62

Thin Film Electronics (OTCQX:TFECF)

$0.166

0.00%

0.00%

0.00%

NMF

NMF

NMF

-0.04

IDEX ASA

$0.443

0.00%

0.00%

0.00%

NMF

NMF

NMF

-0.45

Averages

x-NMF

$0.600

1.61%

17.47%

2.03%

27.57

16.21

105.55

+0.613

Click to enlarge

Data from Reuters, Yahoo! Finance and Company Websites

There's nothing very outstanding about individual holdings in the IT sector. What should be noted is that, again, it serves as a good example for the diversification of the Norwegian economy. Further, the holdings are pretty well diversified among IT: software, wireless components, IT services and solutions and identity solutions.

Industrials

Market Cap

(USD Billions)

Yield

Payout Ratio

5 Year Average Dividend Yield

Total Debt/Equity

P/E

Price/Cash Flow

EPS

Norwegian Air Shuttle (OTCPK:NWARF)

$1.091

0.00%

0.00%

0.00%

558.00

NMF

15.15

-1.25

Stolt-Nielson Ltd (OTCPK:SOIEF)

$0.644

9.92%

21.03%*

5.12%

132.13

4.25

1.82

+2.373

Wilh Wilhelmsen (OTC:WILWY)

$0.930

0.00%

0.00%

4.12%

78.02

NMF

17.95

-0.20

Hexagon Composites (HXGCF)

$0.297

3.23%

237.32%

1.71%

88.52

72.23

27.81

+0.03

Golden Ocean Group (GOGL)

$0.278

8.49%

NMF

4.72%

124.73

NMF

NMF

-1.21

Averages

x-NMF

$0.650

4.33%

64.59%

3.13%

196.28

38.24

15.68

-0.0514

Click to enlarge

Data from Reuters, Yahoo! Finance and Company Websites

Stolt-Nielson Ltd specializes in chemical storage, including tankers, terminals and containers. The company also transports bulk liquid chemicals including 'door-to-door' transportations services for some bulk products. Here's another example, demonstrating that in spite of a global commodities and materials slowdown the shipping and storage industry is doing well. To be fair this in not so in every case, for example, Golden Ocean Group, a shipper of bulk dry cargo reported a loss of $1.21 per share.

Utilities

Market Cap

(USD Billions)

Yield

Payout Ratio

5 Year Average Dividend Yield

Total Debt/Equity

P/E

Price/Cash Flow

EPS

Scatec Solart ASA

OL: SSOL

$0.362

0.81%

37.50%

of EPS

NMF

710.01

46.04

10.01

0.08

Click to enlarge

Data from Reuters, Yahoo! Finance and Company Websites

There's only one utility in the group, Scatec Solart. The company does have an interesting business model. It builds, owns, maintains and operates solar power plants internationally: Africa, Asia, Middle East, Europe South America and the U.S.

Click to enlarge

As the chart demonstrates, both funds have been halved by the commodity price collapse which began about June of 2014. The high for ENOR was just under $35.00 and for NORW $18.58. They're now trading at just over $17.00 and $8.50 respectively. The problem with these two funds is not the energy sector per se. Rather it seems to be a function of the MSCI index structure: it weights too heavily on energy thus the funds follow. There are other single country, petro-state focused funds which are doing rather well, for example, the iShares MSCI Qatar Capped ETF (NASDAQ:QAT). One may compare with "The Pearl of the Arabian Peninsula", posted on Seeking Alpha a few weeks ago. The point is that Qatar, like Norway is well able to handle the downturn in oil. The Qatar sovereign wealth fund is an economic backstop for the economy and perhaps as large as Norges' fund. The Qatari economy is otherwise small but reasonably well diversified with a large international financial sector. However, less than 6% of the fund is weight towards energy. Another example is iShare's MSCI UAE Capped ETF (NASDAQ:UAE); please refer to "Undiscovered Dividend?"

In both of these this cases, the MSCI index builds on the respective economy's strengths and not their weaknesses. In the Case of both Norway focused funds, MSCI sacrifices Norway's economic diversity for a, perhaps, too heavy weighting on energy.

So are either NORW or ENOR a good single country focused fund to invest in? Well the answer is obviously they are if oil prices and global petroleum supply and demand revert to the mean. On the other hand, if one wishes to employee a little risk capital and a fair amount of patience, either of these may generate good returns in the long run.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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