Last week, Sweden’s central bank, the Riksbank, surprisingly cut interest rates to 0.25% from 0.75%. Most economists were expecting a reduction to 0.5%.
The news did not have much of an impact on the iShares MSCI Sweden ETF (EWD) as the lone Sweden ETF fell half a percent on heavy volume during Thursday’s holiday-shortened U.S. trading session. Notably, EWD is not the only ETF tracking equities in a Nordic nation that is in the rate cut limelight. [Sweden ETF Remains Sturdy]
The Global X Norway 30 ETF (NORW) and the iShares MSCI Norway Capped ETF (ENOR) could be the next Nordic ETFs to be in focus on interest rate action. It is expected that Norway’s central bank, the Norges Bank, may be forced to lower rates in response to Sweden’s rate cut and recent action from the European Central Bank.
Norges Bank “signaled last month that it may also lower rates as it seeks to strike a balance between supporting growth and limiting krone strength. Policy makers kept the deposit rate at 1.5 percent on June 19, and pushed back the timing of tightening until the end of 2015, from a previous estimate of mid-year,” reports Saleha Mohsin for Bloomberg.
Norwegian equities started 2014 lagging counterparts in other European markets, including peripheral Europe, but rising oil prices have recently driven Norwegian stocks higher. Over the past three months, NORW is up 10% while ENOR is higher by 6.7%. [Norway ETFs Lagging]
Norway is Western Europe’s largest oil exporter and one of the largest non-OPEC producers in the developed world. The country’s status as a major oil producer is highlighted by the aforementioned ETFs. For example, NORW allocates nearly 20% of its weight to state-run Statoil (STO), more than 800 basis points above the weight given to the ETF’s second-largest holding.
That oil exporter status also underscore the importance of defending the Norwegian krone against rival currencies, namely the euro. As speculation has grown Norges Bank will lower rates, the Norwegian krone has tumbled.
“The krone is down about 3 percent against the euro following the bank’s June 19 decision. After the Swedish krona, it’s the worst performer this year among 10 major currencies tracked by Bloomberg Correlation-Weighted indexes,” according to Bloomberg.
However, Norwegian stocks have yet to respond to rate cut speculation. Since June 19, NORW and ENOR are down 1.3% and 3.9%, respectively. [Tactical Use of Single-Country ETFs]
A possible catalyst for Norwegian stocks is valuation. Stocks in Norway currently trade well below their historical cyclically-adjusted price-to-earnings ratio (CAPE). For example, ENOR’s P/E ratio is about 16.7 compared to 21.7 for the iShares Europe ETF (IEV).
Global X Norway 30 ETF