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Scandinavia: Viking or Valhalla

|Includes: WisdomTree Europe SmallCap Dividend ETF (DFE), DLS

I am continuing to review the regional positions in my global portfolio.  The nordic allocation is a small part but needs consideration against other European regions and other parts of the world.  My outlook is decidely mixed and varying by country. The region has historically and recently been dominated by the Swedes, who have an outsized portion of the regional GDP.

The region had been benefiting from the emerging growth on their shores in the baltic republics of Estonia, Latvia and Lithuania as they shed their communist past and embraced market reforms.  The baltics embraced a subprime culture by borrowing massively to fund huge government deficits (>10% of GDP) and buy mortgages denominated in Kroners, Euros.  Post Lehman markets took a very dim view to that leveraged growth model and decimated these currencies.  Consumers woke up to mortgages that they had to pay in appreciated Kroners, while their pay was in depreciated currencies, leading to massive defaults and a further decimation of the currencies.  Swedish banks Swedbank, SEB had been major lenders (About 20% of the GDP) and have since been taking massive losses that threaten their ability to stay in business absent government guarantees.  This deleveraging is reducing credit to domestic consumers and crimping spending by consumers and businesses.

The macro shock aside the varying economies in the region had a variety of structures and policies as the crisis unfolded.
Norway: This is an oil based economy driven by North Sea reserves it shares with Britain.  There is some fishing and shipping that adds to the economy as well.  The norwegians have been planning for the end of the oil bonanza and building up a significant sovereign fund that has allowed them to stimulate the economy during the downturn.  The rise in oil prices and trade surplus has helped as well.  The Krone has been the unsung hero of the currency markets, driven by the strong fundamentals.  They are in great shape and should do well coming out as well.

Sweden: They drive the regional economy and have a well deversified economy. They had gone through a banking crisis in the early 1990s and recovered well.  Their economy is driven by significant manufacturing exports (54% of GDP, Volvo, Ericsson, Electrolux) that is suffering with their customers in the US, EU.  The strength in the kroner recently also affected their competitiveness.  They will see some improvement from the inventory replinishment ongoing. 

They are going to take time to recover consumer spending from the increase more moderate rise in debt and credit reduction from Nordic banks.  Their economic stats bear resemblence to the American cousin with 9% unemployment, quantitative easing & significant first quarter GDP contraction (>6%). They are in the ER and will survive but have ongoing issues.

Denmark:  Slow boat from china has a Danish flag.  The collapse in global trade as seen in Baltic Dry Index had really affected them.  Chinese stockpiling of commodities earlier this year did help speed the recovery.  They are dependent on a robust improvement in world trade which we are unlikely to see.  That said they should do alright.

Finland: Used to be "Whats good for GM is good for America".  Nokia fits the bill in Finland and the global customer deleveraging and competive pressures from Apple, Google, Palm have not been good for the flying finns.  Their GDP is still shrinking and with a concentrated economy they do not look that great.

Iceland: Turns out that you can lend out more than 100% of your GDP, means you are borrowing from one country to lend to another.  When Lehman hit the tide went out and they were missing their shorts.  IMF gave them a loan to tide things over but they are looking at a long drawn out depression.  It is possible that they maybe expedited into the Eurozone but that will be too late to rescue them from some painful times.

Disclosure: Long FNORX, FIEUX, DFE, DLS, HAINX